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Dynamic duopoly with learning through market experimentation

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Summary

This paper analyzes how learning behaviors can substantially modify the outcome of competition in an oligopolistic industry facing demand uncertainty. We consider the case of a symmetric duopoly game where firms have imperfect information about market demand and learn through observing the volume of their sales. The main body of the paper consists in showing how market experimentation can explain the existence ofprice-dispersion in an oligopolistic industry. We study this phenomenon and its dynamic evolution in the context of an Hotelling duopoly model; we then extend the analysis to general demand functions and toN-firm oligopolies. We discuss some implications of the public good aspect of information about market demand. We then conclude with a few comments on what happens when the value of information in the oligopolistic industry is negative.

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Authors and Affiliations

  1. European Bank for Reconstruction and Development and Nuffield College, Oxford, 122 Leadenhall Street, EC3V 4EB, London, UK

    Philippe Aghion

  2. Departemento de Fundamantos del Analysis Económico and Instituto de Economia Pública, UPV, Avda del Lehendakari Aguirre 83, E-48015, Bilbao, Spain

    Maria Paz Espinosa

  3. CEPREMAP and CREST-LEI, 142 Rue Chevaleret, F-75013, Paris, France

    Bruno Jullien

Authors
  1. Philippe Aghion
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  2. Maria Paz Espinosa
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  3. Bruno Jullien
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Additional information

We are very grateful to Patrick Bolton for his helpful advice. We also wish to thank Richard Caves, Anthony Creane, Jean-Jacques Laffont, Andreu Mas-Colell, Eric Maskin, Jean-Charles Rochet, Margaret Slade, John Sutton, Jean Tirole, Mike Whinston and an anonymous referee.

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Aghion, P., Espinosa, M.P. & Jullien, B. Dynamic duopoly with learning through market experimentation. Econ Theory 3, 517–539 (1993). https://doi.org/10.1007/BF01209700

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  • DOI: https://doi.org/10.1007/BF01209700

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