Firms have Partial Knowledge: Evidence From a Reform

How can firms persistently misoptimize, and how can they learn? A pricing reform forced firms to adjust most prices. Because consumers exhibit left-digit bias, optimal pricing implies setting prices just below round numbers and avoiding round prices. The initial response revealed that firms operated with partial knowledge, even in the long run. Partial knowledge enables mistakes to persist. At the same time, firms were able to learn, which highlights exploration as a way to improve and lack of exploration as fostering partial knowledge. This paper encourages researchers to treat firms’ misoptimization as a descriptive benchmark and urges practitioners to invest in learning processes.