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Optimal Experimentation in a Changing Environment

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Author Info

  • Godfrey Keller

    (London School of Economics)

  • Sven Rady

    (Graduate School of Business, Stanford University)

Abstract

This paper studies optimal experimentation by a monopolist who faces an unknown demand curve subject to random changes, and who maximises profits over an infinite horizon in continuous time. We show that there are two qualitatively very different regimes, determined by the discount rate and the intensities of demand curve switching, and the dependence of the optimal policy on these parameters is discontinuous. One regime is characterised by extreme experimentation and good tracking of the prevailing demand curve, the other by moderate experimentation and poor tracking. Moreover, in the latter regime the agent eventually becomes `trapped' into taking actions in a strict subset of the feasible set.

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File URL: http://128.118.178.162/eps/game/papers/9801/9801001.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Game Theory and Information with number 9801001.

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Length: 57 pages
Date of creation: 20 Jan 1998
Date of revision:
Handle: RePEc:wpa:wuwpga:9801001

Note: Type of Document - PDF; pages: 57 ; figures: included
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Web page: http://128.118.178.162

Related research

Keywords: Bayesian Learning; Monopoly Experimentation; Optimal Control;

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