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Robust Monopoly Pricing

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Abstract

We consider a robust version of the classic problem of optimal monopoly pricing with incomplete information. In the robust version of the problem the seller only knows that demand will be in a 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. 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. The resulting optimal pricing policy under either criterion is robust to the model uncertainty. Finally we derive distinct implications of how a monopolist responds to an increase in ambiguity under each criterion.

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File URL: http://cowles.econ.yale.edu/P/cd/d15a/d1527-r.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1527R.

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Length: 36 pages
Date of creation: Jul 2005
Date of revision: Apr 2007
Handle: RePEc:cwl:cwldpp:1527r

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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Keywords: Monopoly; Optimal pricing; Robustness; Multiple priors; Regret;

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References

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Citations

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Cited by:
  1. Martin Szydlowski, 2012. "Ambiguity in Dynamic Contracts," Discussion Papers 1543, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Ronald Stauber, 2014. "A framework for robustness to ambiguity of higher-order beliefs," International Journal of Game Theory, Springer, vol. 43(3), pages 525-550, August.
  3. Alfredo Di Tillio & Nenad Kos & Matthias Messner, 2012. "The Design of Ambiguous Mechanisms," Working Papers 446, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  4. Renou, Ludovic & Schlag, Karl H., 2010. "Minimax regret and strategic uncertainty," Journal of Economic Theory, Elsevier, vol. 145(1), pages 264-286, January.
  5. Handel, Benjamin R. & Misra, Kanishka & Roberts, James W., 2013. "Robust firm pricing with panel data," Journal of Econometrics, Elsevier, vol. 174(2), pages 165-185.
  6. Dirk Bergemann & Karl H Schlag, 2007. "Pricing without Priors," Levine's Bibliography 122247000000001557, UCLA Department of Economics.
  7. 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.
  8. Kristóf Madarász & Andrea Prat, 2010. "Screening with an Approximate Type Space," STICERD - Theoretical Economics Paper Series /2010/548, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  9. Michal Król, 2011. "Product differentiation decisions under ambiguous consumer demand and pessimistic expectations," The School of Economics Discussion Paper Series 1103, Economics, The University of Manchester.
  10. Andrea Gallice, 2006. "Predicting one Shot Play in 2x2 Games Using Beliefs Based on Minimax Regret," Working Papers 2006.31, Fondazione Eni Enrico Mattei.
  11. Stoye, Jörg, 2012. "Minimax regret treatment choice with covariates or with limited validity of experiments," Journal of Econometrics, Elsevier, vol. 166(1), pages 138-156.

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