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Monopoly Pricing under Demand Uncertainty: Final Sales versus Introductory Offers

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Author Info
Volker Nocke () (Department of Economics, University of Pennsylvania)
Martin Peitz () (Department of Economics, University of Mannheim)

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Abstract

We study rationing as a tool of the monopolist’s selling policy when demand is uncertain. Three selling policies are potentially optimal in our environment: uniform pricing, final sales, and introductory offers. Final sales consist in charging a high price initially, but then lowering the price while committing to a total capacity. Consumers with a high valuation may decide to buy at the high price since the endogenous probability of rationing is higher at the lower price. Introductory offers consist 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 the optimal selling policy involves either uniform pricing or final sales. Introductory offers may dominate uniform pricing, but can never be optimal if the monopolist can also use final sales.

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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 04-027.

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Length: 30 pages
Date of creation: 23 Jun 2004
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Handle: RePEc:pen:papers:04-027

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Related research
Keywords: Rationing priority pricing sales demand uncertainty introductory offer price dispersion advance purchase discount

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Find related papers by JEL classification:
L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
M31 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Marketing

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  1. 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. [Downloadable!]
    Other versions:
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