We examine a monopoly facing an uncertain demand and maximizing profits over a two-period horizon. Conditions are developed under which the firm will find it optimal to "experiment," or adjust initial prices or quantities away from their myopically optimal level in order to increase the informativeness of observed market outcomes and hence increase future profits. We establish conditions under which experimentation will lead a quantity-setting firm to increase or decrease quantity. Finally, we develop conditions under which experimenting firms will choose to be either price-setters or quantity-setters. 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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