Just Starting Out: Learning and Equilibrium in a New Market
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.
We are grateful to Paul Auckland and Graham Hathaway of National Grid and Ian Foy of Drax Power for useful conversations about this project. We have benefited from discussions with Joseph Cullen, Drew Fudenberg, Mar Reguant and Frank Wolak, and from the comments of seminar participants at Boston College, Cornell, Duke, Harvard/MIT, Kellogg, and the NBER Productivity Lunch and IO Program Meeting. Rebecca Diamond, Duncan Gilchrist, Matthew Hlavacek, Daniel Pollmann, Sean Smith, Amanda Starc, and Wei Sun have all provided excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Ulrich Doraszelski & Gregory Lewis & Ariel Pakes, 2018. "Just Starting Out: Learning and Equilibrium in a New Market," American Economic Review, vol 108(3), pages 565-615. citation courtesy of