MARKET DIFFUSION WITH 2-SIDED LEARNING

We analyze the diffusion of a new product of uncertain value in a duop olistic market. Both sides of the market, buyers and sellers, learn th e true value of the new product from experiments with it. Buyers have heterogeneous preferences over the products and sellers compete in pri ces. The pricing policies and market shares in the unique Markov-perfe ct equilibrium are obtained explicitly. The dynamics of the equilibriu m market shares display excessive sales of the new product relative to the social optimum in early stages and too-low sales later on. The di ffusion path of a successful product is S-shaped.