Market Experimentation in a Dynamic Differentiated-Goods Duopoly

R Keller and Sven Rady

Game Theory and Information from University Library of Munich, Germany

Abstract: We study the evolution of prices in a symmetric duopoly where firms are uncertain about the degree of product differentiation. Customers sometimes perceive the products as close substitutes, sometimes as highly differentiated. Firms learn about their competitive environment from the quantities sold and a background signal. As the informativeness of the market outcome increases with the price differential, there is scope for active learning. In a setting with linear demand curves, we derive firms' pricing strategies as payoff-symmetric mixed or correlated Markov perfect equilibria of a stochastic differential game where the common posterior belief is the natural state variable. When information has low value, firms charge the same price as would be set by myopic players, and there is no price dispersion. When firms value information more highly, on the other hand, they actively learn by creating price dispersion. This market experimentation is transient, and most likely to be observed when the firms' environment changes sufficiently often, but not too frequently.

Keywords: Duopoly Experimentation; Bayesian Learning; Stochastic Differential Game; Markov Perfect Equilibrium; Mixed Strategies; Correlated Equilibrium (search for similar items in EconPapers)
JEL-codes: C73 D43 D83 (search for similar items in EconPapers)
Pages: 37 pages
Date: 1998-10-16, Revised 1999-08-20
New Economics Papers: this item is included in nep-gth and nep-mic
Note: Type of Document - Acrobat PDF; prepared on PC; pages: 37 ; figures: included
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/game/papers/9810/9810001.pdf (application/pdf)

Related works:
Working Paper: Market Experimentation in a Dynamic Differentiated-Goods Duopoly (1999)
Working Paper: Market experimentation in a dynamic differentiated-goods duopoly (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpga:9810001

Access Statistics for this paper

More papers in Game Theory and Information from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ( this e-mail address is bad, please contact ).