THE IGNORANT MONOPOLIST - OPTIMAL LEARNING WITH ENDOGENOUS INFORMATION

Economics lacks a good theory of the pricing and output decisions of a monopolist which does not know its demand-we inevitably assume that t he monopolist knows much more about demand conditions than is reasonab le. I present a model in which demand information is generated endogen ously. When information is endogenous the monopolist has an incentive to experiment with price and quantity. I derive the direction of exper imentation, characterize an important value function arising from dyna mic programming problems with learning, and relate the results to Blac kwell's comparison of experiments.