Wednesday, July 8, 2020
Ali Kakhbod, Massachusetts Institute of Technology (MIT) - Department of Economics and Giacomo Lanzani, Massachusetts Institute of Technology (MIT) - Department of Economics explain Market Power and Asymmetric Learning in Product Markets.
ABSTRACT: We study how market power, along with asymmetries in learning technologies, affect trading in a product market. In this market, a new product of unknown quality is introduced to challenge a pre-existing product of known quality. We show that market efficiency (the first-best) is achieved independent of how large or small the market power is if buyers are symmetric in their learning technologies. However, if buyers are asymmetric, only a monopolistic market in which the seller of the old product also markets the new one is efficient. We identify inefficiency as a learning externality that consumption of the unknown quality product by one buyer generates to the other buyers. The equilibrium inefficiency has two important features:
(i) Efficiency at the top: the threshold for starting to serve the best learners (i.e., to enter into a Beta phase) remains the optimal one;
(ii) Non-monotonicity: distortions are not monotone in the extent of the asymmetry.
Importantly, if sellers can offer take-it-or-leave-it multilateral contracts, the distortion disappears. Finally, we explore the robustness of our results under different assumptions about the ability to price discriminate and other market structures.