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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, 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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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, 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: 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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Citations

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Cited by:
  1. 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.
  2. Madaràsz, Kristòf & Prat, Andrea, 2010. "Screening with an Approximate Type Space," CEPR Discussion Papers 7900, C.E.P.R. Discussion Papers.
  3. Dirk Bergemann & Karl H Schlag, 2007. "Pricing without Priors," Levine's Bibliography 122247000000001557, UCLA Department of Economics.
  4. Martin Szydlowski, 2012. "Ambiguity in Dynamic Contracts," Discussion Papers 1543, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. 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.
  6. Andrea Gallice, 2006. "Predicting one Shot Play in 2x2 Games Using Beliefs Based on Minimax Regret," Working Papers 2006.31, Fondazione Eni Enrico Mattei.
  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.

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