Strategic Experimentation With Congestion

Abstract

This paper considers a two-player game of strategic experimentation with competition. Each agent faces a two-armed bandit problem where she continually chooses between her private risky arm and a common, safe arm. Each agent has exclusive access to her private arm. However, the common arm can only be activated by one agent at a time. This congestion creates negative payoff externalities. Our main finding is that congestion gives rise to new strategic considerations: players perceive a strategic option value from occupying the common arm, making it more attractive than in the absence of competition or when switching is irreversible.