Adaptive learning models of consumer behavior

In a model of dynamic duopoly, optimal price policies are characterized assuming consumers adaptively about the relative quality of the two products. A contrast is made between belief-based reinforcement learning. Under reinforcement learning, consumers can become locked into the habit of chasing inferior goods. Such lock-in permits the existence of multiple history-dependent asymmetric states in which one firm dominates. In contrast, belief-based learning rules must lead asymptotically correct beliefs about the relative quality of the two brands and so in this case there is a unique steady (c) 2007 Elsevier B.V. All rights reserved.