Experimentation in Markets

Posted: 28 Jul 2000

See all articles by Juuso Valimaki

Juuso Valimaki

Helsinki School of Economics; University of Southampton - Division of Economics

Dirk Bergemann

Yale University - Cowles Foundation - Department of Economics; Yale University - Cowles Foundation

Abstract

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.

JEL Classification: L11

Suggested Citation

Valimaki, Juuso and Bergemann, Dirk, Experimentation in Markets. Review of Economic Studies, Vol. 67, No. 2, April 2000. Available at SSRN: https://ssrn.com/abstract=234812

Juuso Valimaki

Helsinki School of Economics ( email )

P.O. Box 21210
Helsinki 00100, 00101
Finland

University of Southampton - Division of Economics ( email )

Southampton, SO17 1BJ
United Kingdom
+44 23 8059 3263 (Phone)

Dirk Bergemann (Contact Author)

Yale University - Cowles Foundation - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-3592 (Phone)
203-432-2128 (Fax)

HOME PAGE: http://www.econ.yale.edu/~dirk/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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