It is now widely recognized that the acquisition of information plays a key role in real world economies as well as in theoretical economic analyses. This project studies experimentation by consumers and firms with different decisions to acquire better information for future decisions. For example, firms will choose output levels above or below what they think is profit maximizing in order to test and improve their information about the market. This type of experimentation is widely observed but is not adequately explained by existing economic theory. This project will help improve our understanding of experimentation by consumers and by producers by formulating general models of information acquisition through experimentation and analyzing the comparative statics and the existence of solutions to these models. Specifically, the project studies a maximizing consumer who chooses output to get both present utility and better information for making future decisions. Preliminary results show that consumption with experimentation will be greater than myopically optimal levels of consumption. But these results depend on very restrictive assumptions about consumer uncertainty. This project relaxes these assumptions in order to find more general and realistic results and to examine interesting special cases. The project deals with models of entry in which the incumbent firm has more information than potential entrants. Preliminary work by the investigator demonstrates that the incumbent firm can discourage new entrants by producing more than the output that maximizes current profits. This result holds even when the potential entrants know that the incumbent firm is trying to persuade them through its pricing and output policies that the industry is less profitable than it actually is. These entry models assume that potential entrants choose either to enter or not. This project analyzes the much more complicated but also more realistic situation in which potential entrants can test the market by output decisions.
