Oligopoly Learning Dynamics

Abstract

We characterize the dynamics of an industry in which demand and costs are constantly evolving so that firms are always adjusting output in response. Firms receive private information about their costs and privately observe components of demand. In addition, firms extract information from prices about the signals that rivals receive and via their influence on price, firms account for their influence on the information of rivals, and hence their action choices. We derive how the weights that firms place on each piece of information in their output choices vary over time. We establish that output intensities on publicly-known demand exceed those on privately-observed demand; the information content of prices is more sensitive to private cost uncertainty than private demand uncertainty; and the positively correlated forecast error structure causes output intensities via information in prices by a rival on older privately-observed demand shocks to exceed those by an informed firm.