The Monopolistic Firm, Random Demand, and Bayesian Learning

Abstract

We extend the one-period model of a monopolistic firm with random demand into an intertemporal model under uncertainty. Compared to the myopic one-period output, the intertemporal output for the current period may be higher, equal to, or lower depending upon the effect of the current period's decisions on the discounted expected utilities derived from future periods' profits. When the demand function contains an unknown parameter whose true value the firm wishes to learn, we establish that while incurring a forgone utility in the learning process, the firm expects to realize future discounted utilities which would at least cover the expected cost of learning.