"Entry and experimentation in oligopolistic markets for experience goods"
JEL codes: L13, L15, D82, D83
Keywords: Entry, experimentation, asymmetric information, bandit
Abstract: We investigate a two-period Bertrand market in which one seller introduces an experience good. The new product competes with an alternative good of known quality. Ex ante neither sellers nor consumers know the value of the new product. While consumers can learn their valuation for the new good by actual consumption (experimentation), sellers cannot observe experimentation outcomes. Thus, asymmetric information arises if the buyer experiments. As a result, the equilibrium is inefficient, and too little entry occurs.