Market Power and Asymmetric Learning in Product Markets

We study how market structures and asymmetries in learning technologies affect trade in a product market. In this market, a new product of unknown quality is introduced to challenge a pre-existing product of known quality. We show that market efficiency (the first-best) is achieved both under monopoly and competition if buyers are symmetric in their learning process. Instead, if buyers are asymmetric, only a monopolistic market in which the seller of the old product also sells the new one is efficient. We identify inefficiency as a learning externality that consumption of the unknown quality product by one buyer generates for the other buyers. The equilibrium inefficiency has two essential features: (i) Efficiency at the top: the threshold for starting to serve the best learners (i.e., to enter into a Beta phase) remains the optimal one; (ii) Non-monotonicity: distortions are not monotone in the extent of the asymmetry. Importantly, if sellers can offer take-it-or-leave-it multilateral contracts, the distortion disappears. Finally, we explore our results’ robustness under different assumptions about the ability to price discriminate and other market structures.