Experimentation in markets

We present a model of entry and exit with Bayesian learning and price compe tition. A new product of initially unknown quality is introduced in the mar ket, and purchases of the product yield information on its true quality. We assume that the performance of the new product is publicly observable. As agents learn from the experiments of others, informational externalities ar ise. We determine the Markov Perfect Equilibrium prices and allocations. In a si ngle market, the combination of the informational externalities among the b uyers and the strategic pricing by the sellers results in excessive experim entation. If the new product is launched in many distinct markets, the path of sales converges to the efficient path in the limit as the number of mar kets grows.