Price Dispersion and Learning in a Dynamic Differentiated-Goods Duopoly

We study price-setting duopolists who are uncertain about the degree to which their products are perceived as differentiated. Customers' sensitivity to price differences varies over time and must be estimated from the quantities sold. The information content of these quantities increases with the price difference, so there is scope for active learning. In equilibrium, price dispersion arises in a cyclical fashion, and is most likely to be observed when customers' sensitivity to price differences is moderately variable over time. The duopolists can increase profits by using correlated pricing strategies. Such coordination need not hurt consumers, provided they are sufficiently impatient