We 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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Paper provided by European University Institute in its series Economics Working Papers with number
ECO2005/10.
Length: Date of creation: 2005 Date of revision: Handle: RePEc:eui:euiwps:eco2005/10
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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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