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Robust Monopoly Pricing

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Author Info
Dirk Bergemann () (Cowles Foundation, Yale University)
Karl Schlag (Department of Economics, Universitat Pompeu Fabra)

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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, 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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File URL: http://cowles.econ.yale.edu/P/cd/d15a/d1527-rr.pdf
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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1527RR.

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Length: 43 pages
Date of creation: Jul 2005
Date of revision: Sep 2008
Handle: RePEc:cwl:cwldpp:1527rr

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

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

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Find related papers by JEL classification:
C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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References listed on IDEAS
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    Other versions:
  5. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Andrea Gallice, 2006. "Predicting one Shot Play in 2x2 Games Using Beliefs Based on Minimax Regret," Working Papers 2006.31, Fondazione Eni Enrico Mattei. [Downloadable!]
  2. Dirk Bergemann & Karl H. Schlag, 2007. "Pricing without Priors," Cowles Foundation Discussion Papers 1625, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
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