Actively Learning about Demand and the Dynamics of Price Adjustment.

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.