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Optimal Experimentation in a Changing Environment

Author

Listed:
  • 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.

Suggested Citation

  • Godfrey Keller & Sven Rady, 1998. "Optimal Experimentation in a Changing Environment," Game Theory and Information 9801001, EconWPA.
  • Handle: RePEc:wpa:wuwpga:9801001 Note: Type of Document - PDF; pages: 57 ; figures: included
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Bayesian Learning; Monopoly Experimentation; Optimal Control;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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