The authors empirically examine how firms learn to set prices in a new market. The 2012 privatization of off-premises liquor sales in Washington State created a unique opportunity to observe retailers learning to set prices from the beginning of the learning process. Tracking this market as it evolved through time, the authors find that firms indeed learn to set more profitable prices, that these prices increasingly reflect demand fundamentals, and that prices ultimately converge to levels consistent with (static) profit maximization. The authors further demonstrate that initial pricing mistakes are largest for products whose demand conditions differ the most from those of previously privatized markets, that retailers with previous experience in the category are initially better informed, and that learning is faster for products with more precise sales information. These findings indicate that firm behavior converges to rational models of firm conduct, but such convergence takes time to unfold and plays out differently for different firms. These patterns suggest the important roles of firms’ learning and heterogeneous firm capabilities.

Many platform strategies focus on indirect network effects between sellers through platform expansion. In this paper, we show sellers on the console video game platform generate a positive intertemporal spillover effect and expand the demand for other sellers, holding the set of platform adopters fixed. We propose a novel identification strategy that leverages exogenous variation in the release timing of games exclusively available on a console platform, and examine how this variation affects the sales of games available on both platforms. We find a sizable intertemporal demand spillover effect between games: A 1% increase in total copies sold on a platform leads to a 0.153% increase in the sales of other games in the next month (i.e., an elasticity of 0.153). Additional analysis suggests this demand spillover effect is reminiscent of habit formation on the consumer side, in that past purchases keep end users active on the platform. Our finding provides a potential explanation for recent platform sales events and subscription services that provide free games to consumers every month. This paper was accepted by Eric Anderson, marketing.