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Monopoly experimentation

Author

Listed:
  • Amparo Urbano Salvador

    (Universitat de València)

  • Larry Samuelson

    (Penn State University)

  • Leonard J. Mirman

    (University of Virginia)

Abstract

This paper considers a firm facing an uncertain demand curve. The firm can experimentally adjust its output in order to gain information that willincrease expected future profits. We examine two basic questions. Under whatconditions is it worthwhile for the firm to experiment? How does the firmadjust its output away from the myopic optimism to exploit its ability to experiment? Two necessary conditions are established for experimentation tooccur, involving requirements that experimentation be informative and thatinformation be valuable. Conditions are then established for experimentationto induce the firm to increase or decrease quantity. These results, whichcontain several previous analyses as special cases, provide an understanding of experimentation that will be useful in a number of applications.

Suggested Citation

  • Amparo Urbano Salvador & Larry Samuelson & Leonard J. Mirman, 1990. "Monopoly experimentation," Working Papers. Serie AD 1990-04, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  • Handle: RePEc:ivi:wpasad:1990-04
    as

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    File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-1990-04.pdf
    File Function: Fisrt version / Primera version, 1990
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    Other versions of this item:

    • Mirman, Leonard J & Samuelson, Larry & Urbano, Amparo, 1993. "Monopoly Experimentation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 549-563, August.

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