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American Economic Review Vol. 108 No. 3 2018

Just Starting Out: Learning and Equilibrium in a New Market

Ulrich Doraszelski1; Gregory Lewis2; Ariel Pakes3

1 Wharton School, University of Pennsylvania, 3620 Locust Walk, Philadelphia, PA 19104, CEPR, and NBER (email: ) · 2 Microsoft Research, Microsoft Research New England, 1 Memorial Drive, Cambridge, MA 02142, and NBER (email: ) · 3 Department of Economics, Harvard University, Littauer Center 117, 1805 Cambridge Street, Cambridge, MA 02138, and NBER (email: )

Abstract

We document the evolution of the new market for frequency response within the UK electricity system over a six-year period. Firms competed in price while facing considerable initial uncertainty about demand and rival behavior. We show that prices stabilized over time, converging to a rest point that is consistent with equilibrium play. We draw on models of fictitious play and adaptive learning to analyze how this convergence occurs and show that these models predict behavior better than an equilibrium model prior to convergence.

DOI
10.1257/aer.20160177
Volume
108
Issue
3
Pages
565-615
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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