Actively Learning by Pricing: A Model of an Experimenting Seller.
This article presents a model of a rational seller who is actively learning the slope of his demand curve via his pricing strategy. Consequently, this seller optimally experiments with his price. Resulting price patterns show a tendency for discreteness (as observed in the data), which has proved to...
| Published in: | Economic Journal Vol. 127; no. 604; pp. 2216 - 2240 |
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| Format: | Article |
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Oxford University Press / USA
Sep2017
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| Online Access: | View this record in EBSCOhost |
| Summary: | This article presents a model of a rational seller who is actively learning the slope of his demand curve via his pricing strategy. Consequently, this seller optimally experiments with his price. Resulting price patterns show a tendency for discreteness (as observed in the data), which has proved to be a major challenge to most price setting models. The experimentation motive can also replicate the observation that prices are more volatile than costs, as well as the presence of many idiosyncratic price changes in the data. It can do so without a need to assume the existence of large idiosyncratic shocks. |
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