Just Starting Out: Learning and Equilibrium in a New Market†

Just Starting Out: Learning and Equilibrium in a New Market† AbstractWe document the evolution of the new market for frequency response within the UK electricity system over a six-year period. Firms competed in price while facing considerable initial uncertainty about demand and rival behavior. We show that prices stabilized over time, converging to a rest point that is consistent with equilibrium play. 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 an equilibrium model prior to convergence. (JEL D22, D83, L13, L94, L98) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review American Economic Association

Just Starting Out: Learning and Equilibrium in a New Market†

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Publisher
American Economic Association
Copyright
Copyright © 2018 © American Economic Association
ISSN
0002-8282
D.O.I.
10.1257/aer.20160177
Publisher site
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Abstract

AbstractWe document the evolution of the new market for frequency response within the UK electricity system over a six-year period. Firms competed in price while facing considerable initial uncertainty about demand and rival behavior. We show that prices stabilized over time, converging to a rest point that is consistent with equilibrium play. 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 an equilibrium model prior to convergence. (JEL D22, D83, L13, L94, L98)

Journal

American Economic ReviewAmerican Economic Association

Published: Mar 1, 2018

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