Actively Learning About Demand and the Dynamics of Price Adjustment
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By observing the quantity demanded at particular prices, a firm may learn
about the parameters of its demand curve. In such an environment, price
changes obstruct the learning process by inducing additional noise. The
authors' paper constructs a dynamic model where a price-setting firm
endogenously controls the speed of learning. The model provides a possible
explanation for price inertia, as a stable pricing policy allows the firm
to learn more rapidly, which improves future expected profits.
Furthermore, even in the long run, learning continues to affect the firm's
optimal price. Copyright 1990 by Royal Economic Society.
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