MONOPOLY EXPERIMENTATION

We examine a monopoly facing an uncertain demand and maximizing profit s 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 inc rease the informativeness of observed market outcomes and hence increa se future profits. We establish conditions under which experimentation will lead a quantity-setting firm to increase or decrease quantity. F inally, we develop conditions under which experimenting firms will cho ose to be either price-setters or quantity-setters.