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Markup Pricing and Demand Uncertainty

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Abstract

In standard market theory demand and cost functions have to be known to compute optimal price or quantity responses. In case of risk or uncertainty the decisions depend on expectations, i.e. estimated parameters. Even in case of rational inference these expectations itself are uncertain, at least in case of limited cognitive abilities, perception or processing errors. Therefore ex post the expected utility maximizing behavior is not optimal in general. This paper shows that simple rules like Markup Pricing are more robust against errors and estimation risk and could outperform usual rational decision making.

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File URL: http://www.wiwi.uni-jena.de/Papers/wp-b9708.ps
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Paper provided by Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultïät in its series Working Paper Series B with number 1997-08.

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Date of creation: 10 Oct 1997
Date of revision: 01 Jun 1998
Handle: RePEc:jen:jenavo:1997-08

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Related research

Keywords: Markup Pricing; demand uncertainty; bounded rationality; performance; robust behavior;

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References

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  1. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-47, October.
  2. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-91, June.
  3. Nishimura, Kiyohiko G, 1989. "Customer Markets and Price Sensitivity," Economica, London School of Economics and Political Science, vol. 56(222), pages 187-98, May.
  4. Joaquim Oliveira Martins & Stefano Scarpetta & Dirk Pilat, 1996. "Mark-Up Ratios in Manufacturing Industries: Estimates for 14 OECD Countries," OECD Economics Department Working Papers 162, OECD Publishing.
  5. Park, Timothy A. & Lohr, Luanne, 1996. "Wholesaler Markup Decisions Under Demand Uncertainty," Faculty Series 16699, University of Georgia, Department of Agricultural and Applied Economics.
  6. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  7. Fraser, Robert W, 1985. "Uncertainty and the Theory of Mark-up Pricing," Bulletin of Economic Research, Wiley Blackwell, vol. 37(1), pages 55-64, January.
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Cited by:
  1. Markus Pasche, 1998. "An Approach to Robust Decision Making: The Rationality of Heuristic Behavior," Working Paper Series B 1998-10, Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultïät.

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