The Ignorant Monopolist: Optimal Learning with Endogenous Information

Daniel Trefler

International Economic Review, 1993, vol. 34, issue 3, 565-81

Abstract: Economics lacks a good theory of the pricing and output decisions of a monopolist which does not know its demand--we inevitably assume that the monopolist knows much more about demand conditions than is reasonable. I present a model in which demand information is generated endogenously. When information is endogenous the monopolist has an incentive to experiment with price and quantity. I derive the direction of experimentation, characterize an important value function arising from dynamic programming problems with learning, and relate the results to Blackwell's comparison of experiments. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1993
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