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The Ignorant Monopolist: Optimal Learning with Endogenous Information

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Trefler, Daniel

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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.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 34 (1993)
Issue (Month): 3 (August)
Pages: 565-81
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Handle: RePEc:ier:iecrev:v:34:y:1993:i:3:p:565-81

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  1. Christos Koulovatianos & Leonard J. Mirman & Marc Santugini, 2006. "Investment in a Monopoly with Bayesian Learning," Vienna Economics Papers 0603, University of Vienna, Department of Economics. [Downloadable!]
  2. Dirk Bergemann & Valimaki Juuso, 2001. "Entry and Vertical Differentiation," Cowles Foundation Discussion Papers 1302, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  3. Christos Koulovatianos & Leonard J. Mirman & Marc Santugini, 2007. "Optimal Growth and Uncertainty: Learning," Cahiers de recherche 07-05, HEC Montréal, Institut d'économie appliquée, revised Feb 2008. [Downloadable!]
    Other versions:
  4. Hector Chade & Edward E. Schlee, 2000. "Increasing Returns in the Value of Information," Econometric Society World Congress 2000 Contributed Papers 1715, Econometric Society. [Downloadable!]
  5. Volker Wieland, 1996. "Learning by doing and the value of optimal experimentation," Finance and Economics Discussion Series 96-5, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  6. Giuseppe Moscarini & Lones Smith, 1998. "Wald Revisited: The Optimal Level of Experimentation," Cowles Foundation Discussion Papers 1176, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  7. Godfrey Keller, 2005. "The (in)appropriate benchmark when beliefs are not the only state variable," Economics Series Working Papers 223, University of Oxford, Department of Economics. [Downloadable!]
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