Learning by doing, inventory and optimal pricing policy

The notion of the "learning effect" suggests that when a firm introduces a new product, the costs of production will decline as the accumulated output increases. In this paper we analyze this effect on price paths and production rates along time. The distinction between production level and sales level affects the behavior of the firm that can utilize the option of holding inventory. In this case we show that the optimal price increases, even though production costs decrease over time due to "learning by doing.".