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Experimenting to Learn about Demand in Duopoly with Forward‐Looking Consumers

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  • Francisco Ruiz‐Aliseda

Abstract

Using a two‐period model, I show that competition between two symmetric duopolists trying to learn about unknown features of demand results in an informationally suboptimal process. Because a firm’s marginal return to price experimentation equals zero if the rival’s price is matched in the first period, myopic symmetric pricing arises in equilibrium even though a firm’s expected second‐period profit attains a local minimum. Furthermore, forward‐looking consumers suffer from ratcheting because their first‐period purchase decisions partly reveal their preferences, which exacerbates the informational suboptimality of the firms’ experimentation process without affecting their pricing. The role of firm asymmetries is also analyzed.

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  • Francisco Ruiz‐Aliseda, 2019. "Experimenting to Learn about Demand in Duopoly with Forward‐Looking Consumers," Journal of Industrial Economics, Wiley Blackwell, vol. 67(2), pages 279-327, June.
    • Handle: RePEc:bla:jindec:v:67:y:2019:i:2:p:279-327
    DOI: 10.1111/joie.12203
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    Cited by:

    1. Rose Neng Lai & Lawrence Hoc Nang Fong, 2021. "Development Strategies in a Market of High Vacancies and Sticky Rates – The Case of the Hotel Industry," International Real Estate Review, Global Social Science Institute, vol. 24(3), pages 363-383.

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