Just Starting Out: Learning and Equilibrium in a New Market

Ulrich Doraszelski, Gregory Lewis and Ariel Pakes

No 21996, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document the evolution of the newly created market for frequency response within the UK electricity system over a six-year period. Firms competed in price while facing considerable initial uncertainty about market demand and rival behavior. We show that over time prices stabilized, converging to a rest point that is consistent with equilibrium play, and then adjusted to subsequent changes in the market quite quickly. We draw on models of fictitious play and adaptive learning to analyze how this convergence occurs and show that these models predict behavior better than Nash equilibrium prior to convergence.

JEL-codes: D02 D22 D83 L10 L51 (search for similar items in EconPapers)
Date: 2016-02
New Economics Papers: this item is included in nep-ene
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Published as Ulrich Doraszelski & Gregory Lewis & Ariel Pakes, 2018. "Just Starting Out: Learning and Equilibrium in a New Market," American Economic Review, vol 108(3), pages 565-615.

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