NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Just Starting Out: Learning and Equilibrium in a New Market

Ulrich Doraszelski, Gregory Lewis, Ariel Pakes

NBER Working Paper No. 21996
Issued in February 2016
NBER Program(s):IO, PR

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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Document Object Identifier (DOI): 10.3386/w21996

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