American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Just Starting Out: Learning and Equilibrium in a New Market
American Economic Review
(pp. 565–615)
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.Citation
Doraszelski, Ulrich, Gregory Lewis, and Ariel Pakes. 2018. "Just Starting Out: Learning and Equilibrium in a New Market." American Economic Review 108 (3): 565–615. DOI: 10.1257/aer.20160177Additional Materials
JEL Classification
- D22 Firm Behavior: Empirical Analysis
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- L13 Oligopoly and Other Imperfect Markets
- L94 Electric Utilities
- L98 Industry Studies: Utilities and Transportation: Government Policy