DP14075 Overcoming Free-Riding in Bandit Games

Author(s): Johannes Hörner, Nicolas Klein, Sven Rady
Publication Date: October 2019
Keyword(s): Bayesian learning, strategic experimentation, Strongly Symmetric Equilibrium, Two-Armed Bandit
JEL(s): C73, D83
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14075

This paper considers a class of experimentation games with Lévy bandits encompassing those of Bolton and Harris (1999) and Keller, Rady and Cripps (2005). Its main result is that efficient (perfect Bayesian) equilibria exist whenever players' payoffs have a diffusion component. Hence, the trade-offs emphasized in the literature do not rely on the intrinsic nature of bandit models but on the commonly adopted solution concept (MPE). This is not an artifact of continuous time: we prove that such equilibria arise as limits of equilibria in the discrete-time game. Furthermore, it suffices to relax the solution concept to strongly symmetric equilibrium.