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The Role of Heterogeneity in a Model of Strategic Experimentation

Author

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  • Kaustav Das

    (Department of Economics, University of Exeter)

Abstract

In this paper, I examine the effect of introducing heterogeneity between players in a model of strategic experimentation. I consider a two-armed bandit problem in continuous time with one safe arm and a risky arm. There are two players and each has an access to such a bandit. A player using the safe arm experiences a safe flow payoff. The risky arm can either be good or bad. A bad risky arm is worse than the safe arm and the good risky arm is better than the safe arm. Players start with a common prior about the probability of the risky arm being good. At a time point, a player can choose only one of the arms. I show that if the degree of heterogeneity between the players is high enough, then there exists a unique Markov perfect equilibrium in simple cut-off strategies. The non-cooperative equilibrium in the heterogeneous model in terms of welfare, always gets a higher rank than any non-cooperative equilibrium of a homogeneous players model with same or more amount of experimentation in the benchmark.

Suggested Citation

  • Kaustav Das, 2015. "The Role of Heterogeneity in a Model of Strategic Experimentation," Discussion Papers 1507, University of Exeter, Department of Economics.
  • Handle: RePEc:exe:wpaper:1507
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    File URL: https://exetereconomics.github.io/RePEc/dpapers/DP1507.pdf
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    References listed on IDEAS

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    1. Nicolas Klein & Sven Rady, 2011. "Negatively Correlated Bandits," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(2), pages 693-732.
    2. Godfrey Keller & Sven Rady & Martin Cripps, 2005. "Strategic Experimentation with Exponential Bandits," Econometrica, Econometric Society, vol. 73(1), pages 39-68, January.
    3. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
    4. , & ,, 2010. "Strategic experimentation with Poisson bandits," Theoretical Economics, Econometric Society, vol. 5(2), May.
    5. Fershtman, Chaim & Rubinstein, Ariel, 1997. "A Simple Model of Equilibrium in Search Procedures," Journal of Economic Theory, Elsevier, vol. 72(2), pages 432-441, February.
    6. Ufuk Akcigit & Qingmin Liu, 2011. "The Role of Information in Competitive Experimentation," Levine's Working Paper Archive 786969000000000321, David K. Levine.
    7. Klein, Nicolas, 2013. "Strategic learning in teams," Games and Economic Behavior, Elsevier, vol. 82(C), pages 636-657.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Two-armed Bandit; Free-Riding; Learning.;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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