Robust Monopoly Pricing: The Case of Regret
AbstractWe consider a robust version of the classic problem of optimal monopoly pricing with incomplete information. The robust version of the problem is distinct in two aspects: (i) the seller minimizes regret rather than maximizes revenue, and (ii) the seller only knows that the true distribution of the valuations is in a neighborhood of a given model distribution. We characterize the robust pricing policy as the solution to a minimax problem for small and large neighborhoods. In contrast to the classic monopoly policy which is a single deterministic price, the robust policy is always a random pricing policy, or equivalently, a multi-item menu policy. The responsiveness of the robust policy to an increase in risk is determined by the curvature of the static profit function.
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Bibliographic InfoPaper provided by European University Institute in its series Economics Working Papers with number ECO2005/10.
Date of creation: 2005
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Monopoly; Optimal Pricing; Regret; Robustness;
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; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-08-03 (All new papers)
- NEP-IND-2005-08-03 (Industrial Organization)
- NEP-MIC-2005-08-03 (Microeconomics)
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- Renou, Ludovic & Schlag, Karl H., 2010.
"Minimax regret and strategic uncertainty,"
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- Takashi Hayashi, 2011. "Context dependence and consistency in dynamic choice under uncertainty: the case of anticipated regret," Theory and Decision, Springer, vol. 70(4), pages 399-430, April.
- Raghu Suryanarayanan, 2006. "A Model of Anticipated Regret and Endogenous Beliefs," CSEF Working Papers 161, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Dec 2008.
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