Price-setting Decisions Under Experimentation and Rational Inattention
Gustavo Sepúlveda B.
Tesis, Magíster en Economía, IE-PUC, 2020
Abstract: How do firms acquire knowledge to maximize expected profits? In realistic market conditions, firms try to find out their demand facing imperfect information.There are two learning strategies through which firms can improve their information about markets to set optimal prices. On the one hand ,a firm can experiment with price movements away from the optimal to update its demand elasticity knowledge, seeing how much its profit changes. On the other, a firm can pay limited attention to informative signals in the environment. In a two-stage model that implements experimentation and rational inattention, this paper studies the price patterns of a monopolistic seller who faces an uncertain demand curve and whose price-setting decisions are made through active learning in an imperfect-information scenario.Besides, it explores conditions under which the seller considers to complement or substitut these learning strategies.