Demand and Supply in New Markets: Diffusion with Bilateral Learning

I explore the endogenous joint evolution of demand and supply in new markets. Firms and consumers learn, in a Bayesian fashion, by observing the behavior of other firms and consumers, respectively. As a result, endogenous information diffusion takes place on both sides of the market. In equilibrium, entry occurs in waves and its level depends on two distinct informational effects. The model identifies an externality that provides a natural explanation for S-shaped diffusion paths: entry reveals information to the consumers about the value of the new product, and thus early waves of entry affect the expected profitability of subsequent entry.