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Monopoly Pricing under Demand Uncertainty: Final Sales versus Introductory ffers

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  • Volker Nocke

    ()
    (Department of Economics, University of Pennsylvania)

  • Martin Peitz

    ()
    (School of Business Administration, International University of Germany)

Abstract

We study rationing as a tool of the monopolist’s pricing strategy when demand is uncertain. Three pricing strategies are potentially optimal in our environment: uniform pricing, final sales, and introductory offers. The final sales strategy consists in charging a high price initially, but then lowering the price while committing to a total capacity. Consumers with high valuations to pay may decide to buy at the high price since the endogenous probability of rationing is higher at the lower price. The introductory offers strategy consists in selling a limited quantity at a low price initially, and then raising price. Those consumers with high valuations who were rationed initially at the lower price may find it optimal to buy the good at the higher price. We show that while the introductory offers strategy may dominate uniform pricing, it is never optimal if the monopolist can use the final sales strategy.

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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 03-002.

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Length: 43 pages
Date of creation: 13 Jan 2003
Date of revision:
Handle: RePEc:pen:papers:03-002

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Keywords: rationing; priority pricing; sales; demand uncertainty; introductory offer; price dispersion;

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References

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  1. Gale, Ian L & Holmes, Thomas J, 1993. "Advance-Purchase Discounts and Monopoly Allocation of Capacity," American Economic Review, American Economic Association, American Economic Association, vol. 83(1), pages 135-46, March.
  2. Prescott, Edward C, 1975. "Efficiency of the Natural Rate," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(6), pages 1229-36, December.
  3. Wilson, Charles A, 1988. "On the Optimal Pricing Policy of a Monopolist," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(1), pages 164-76, February.
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  5. Harris, Milton & Raviv, Artur, 1981. "A Theory of Monopoly Pricing Schemes with Demand Uncertainty," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 347-65, June.
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  7. Eden, Benjamin, 1990. "Marginal Cost Pricing When Spot Markets Are Complete," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(6), pages 1293-1306, December.
  8. Gale, Ian L. & Holmes, Thomas J., 1992. "The efficiency of advance-purchase discounts in the presence of aggregate demand uncertainty," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 10(3), pages 413-437, September.
  9. John G. Riley & Richard Zeckhauser, 1980. "Optimal Selling Strategies:," UCLA Economics Working Papers, UCLA Department of Economics 180, UCLA Department of Economics.
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  11. Rosen, Sherwin & Rosenfield, Andrew M, 1997. "Ticket Pricing," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 40(2), pages 351-76, October.
  12. Dana, James D, Jr, 2001. "Monopoly Price Dispersion under Demand Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(3), pages 649-70, August.
  13. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier, Elsevier.
  14. Karni, Edi & Levin, Dan, 1994. "Social Attributes and Strategic Equilibrium: A Restaurant Pricing Game," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 102(4), pages 822-40, August.
  15. Volker Nocke & Martin Peitz, 2004. "Monopoly Pricing under Demand Uncertainty: Final Sales versus Introductory Offers," PIER Working Paper Archive 04-027, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  16. Chao, Hung-po & Wilson, Robert, 1987. "Priority Service: Pricing, Investment, and Market Organization," American Economic Review, American Economic Association, American Economic Association, vol. 77(5), pages 899-916, December.
  17. Stokey, Nancy L, 1979. "Intertemporal Price Discrimination," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(3), pages 355-71, August.
  18. Chiang, Raymond & Spatt, Chester S, 1982. "Imperfect Price Discrimination and Welfare," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(2), pages 155-81, April.
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  21. Che, Yeon-Koo & Gale, Ian, 2000. "The Optimal Mechanism for Selling to a Budget-Constrained Buyer," Journal of Economic Theory, Elsevier, Elsevier, vol. 92(2), pages 198-233, June.
  22. Vincenzo Denicolo' & Paolo Garella, 1999. "Rationing in a Durable Goods Monopoly," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 44-55, Spring.
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Cited by:
  1. Volker Nocke & Martin Peitz, 2003. "Monopoly Pricing under Demand Uncertainty: Final Sales versus Introductory ffers," PIER Working Paper Archive 03-002, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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