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Robust Monopoly Pricing

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  • Dirk Bergemann
  • Karl Schlag

Abstract

We consider a robust version of the classic problem of optimal monopoly pricing with incomplete information. In the robust version, the seller faces model uncertainty and only knows that the true demand distribution is in the neighborhood of a given model distribution. We characterize the optimal pricing policy under two distinct, but related, decision criteria with multiple priors: (i) maximin expected utility and (ii) minimax expected regret. The resulting optimal pricing policy under either criterion yields a robust policy to the model uncertainty. While the classic monopoly policy and the maximin criterion yield a single deterministic price, minimax regret always prescribes a random pricing policy, or equivalently, a multi-item menu policy. Distinct implications of how a monopolist responds to an increase in uncertainty emerge under the two criteria.

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Bibliographic Info

Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 321307000000000983.

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Date of creation: 13 Apr 2007
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Handle: RePEc:cla:levrem:321307000000000983

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Citations

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Cited by:
  1. Paul Viefers & Philipp Strack, 2014. "Too Proud to Stop: Regret in Dynamic Decisions," Discussion Papers of DIW Berlin 1401, DIW Berlin, German Institute for Economic Research.
  2. Madaràsz, Kristòf & Prat, Andrea, 2010. "Screening with an Approximate Type Space," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7900, C.E.P.R. Discussion Papers.
  3. Handel, Benjamin R. & Misra, Kanishka & Roberts, James W., 2013. "Robust firm pricing with panel data," Journal of Econometrics, Elsevier, Elsevier, vol. 174(2), pages 165-185.
  4. Andrea Gallice, 2006. "Predicting one Shot Play in 2x2 Games Using Beliefs Based on Minimax Regret," Working Papers, Fondazione Eni Enrico Mattei 2006.31, Fondazione Eni Enrico Mattei.
  5. Dirk Bergemann & Karl H Schlag, 2007. "Pricing without Priors," Levine's Bibliography 122247000000001557, UCLA Department of Economics.
  6. Ronald Stauber, 2014. "A framework for robustness to ambiguity of higher-order beliefs," International Journal of Game Theory, Springer, Springer, vol. 43(3), pages 525-550, August.
  7. Alfredo Di Tillio & Nenad Kos & Matthias Messner, 2014. "The Design of Ambiguous Mechanisms," CESifo Working Paper Series 4949, CESifo Group Munich.
  8. Ronald Stauber, 2013. "A Framework for Robustness to Ambiguity of Higher-Order Beliefs," ANU Working Papers in Economics and Econometrics 2013-602, Australian National University, College of Business and Economics, School of Economics.
  9. Ludovic Renou & Karl H. Schlag, 2008. "Minimax regret and strategic uncertainty," Discussion Papers in Economics 08/2, Department of Economics, University of Leicester, revised Apr 2008.
  10. Król, Michał, 2012. "Product differentiation decisions under ambiguous consumer demand and pessimistic expectations," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 30(6), pages 593-604.
  11. Martin Szydlowski, 2012. "Ambiguity in Dynamic Contracts," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1543, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  12. Stoye, Jörg, 2012. "Minimax regret treatment choice with covariates or with limited validity of experiments," Journal of Econometrics, Elsevier, Elsevier, vol. 166(1), pages 138-156.

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