Just Starting Out: Learning and Equilibrium in a New Market / Ulrich Doraszelski, Gregory Lewis, Ariel Pakes.

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Doraszelski, Ulrich

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w21996.Publication details: Cambridge, Mass. National Bureau of Economic Research 2016.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We document the evolution of the newly created market for frequency response within the UK electricity system over a six-year period. Firms competed in price while facing considerable initial uncertainty about market demand and rival behavior. We show that over time prices stabilized, converging to a rest point that is consistent with equilibrium play, and then adjusted to subsequent changes in the market quite quickly. We draw on models of fictitious play and adaptive learning to analyze how this convergence occurs and show that these models predict behavior better than Nash equilibrium prior to convergence.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w21996 (Browse shelf(Opens below))	Not For Loan

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February 2016.

We document the evolution of the newly created market for frequency response within the UK electricity system over a six-year period. Firms competed in price while facing considerable initial uncertainty about market demand and rival behavior. We show that over time prices stabilized, converging to a rest point that is consistent with equilibrium play, and then adjusted to subsequent changes in the market quite quickly. We draw on models of fictitious play and adaptive learning to analyze how this convergence occurs and show that these models predict behavior better than Nash equilibrium prior to convergence.