Acitvely Learning by Pricing: A Model of an Experimenting Seller

33 Pages Posted: 20 Jan 2014

See all articles by Tim Willems

Tim Willems

University of Oxford - Nuffield Department of Medicine

Date Written: December 6, 2013

Abstract

This paper presents a model of a rational seller who is actively learning the slope of his demand curve via his pricing strategy. Consequently, this seller optimally experiments with his price. Resulting price patterns show a lot of discreteness (as observed in the data), which has proved to be a major challenge to most price setting models. The model’s learning dynamics are able to reconcile individual price flexibility with aggregate price sluggishness, while the experimentation motive can explain the presence of many idiosyncratic price changes in the data as well as the observation that prices are more volatile than costs.

Keywords: Active learning, Price experimentation, Nominal rigidities, Sales, Discrete pricing

JEL Classification: D21, D83, E31

Suggested Citation

Willems, Tim, Acitvely Learning by Pricing: A Model of an Experimenting Seller (December 6, 2013). Available at SSRN: https://ssrn.com/abstract=2381430 or http://dx.doi.org/10.2139/ssrn.2381430

Tim Willems (Contact Author)

University of Oxford - Nuffield Department of Medicine ( email )

New Road
Oxford, OX1 1NF
United Kingdom