Journal Article

Experimentation in Markets

Dirk Bergemann and Juuso Välimäki

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 67, issue 2, pages 213-234
Published in print April 2000 | ISSN: 0034-6527
Published online April 2000 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00128
Experimentation in Markets

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We present a model of entry and exit with Bayesian learning and price competition. A new product of initially unknown quality is introduced in the market, and purchases of the product yield information on its true quality. We assume that the performance of the new product is publicly observable. As agents learn from the experiments of others, informational externalities arise.

We determine the Markov Perfect Equilibrium prices and allocations. In a single market, the combination of the informational externalities among the buyers and the strategic pricing by the sellers results in excessive experimentation. If the new product is launched in many distinct markets, the path of sales converges to the efficient path in the limit as the number of markets grows.

Journal Article.  0 words. 

Subjects: Economics

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