Optimal Pricing Policy in the Presence of Experience Effects

Abstract

We use a general model to analyze the optimal intertemporal pricing policy for a monopolist when current and past output play a role in determining future cost and/or demand conditions through, "experience," in production and/or in consumption. As would be expected, the optimal price path depends on the manner in which experience affects demand and cost functions. Three special cases are scrutinized: (1) learning by doing in which production costs are scaled downward over time; (2) learning by doing in which pro- duction costs are translated downward over time; and (3) the case of demand satiation. For these cases, the optimal price paths are shown to be, respectively, decreasing, increasing, and nonmonotonic.