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Spatial Monopoly Pricing in a Stochastic Environment

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    Abstract

    This paper reexamines the welfare implications of three pricing regimes (mill, uniform and discriminatory) for a monopoly in a stochastic environment. It con-siders a risk-averse monopolist faces two markets with stochastic and linear demands. The monopolist is assumed to commit to an irreversible price in each market before the uncertainty is resolved. Several unconventional results are shown to be triggered by the presence of demand uncertainty. The reason for the reversal of orthodox intuition is the asymmetry in the risk chacteristics of the markets and the willingness of the monopolist to trade increased level of expected pro ts for reduced risk.

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    File URL: http://www.econ.sinica.edu.tw/upload/file/05-a004.2008090210014997.pdf
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    Bibliographic Info

    Paper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 05-A004.

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    Length: 23 pages
    Date of creation: May 2005
    Date of revision:
    Handle: RePEc:sin:wpaper:05-a004

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    Related research

    Keywords: spatial pricing; monopoly; demand uncertainty;

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    1. Anderson, Simon P & de Palma, Andre & Thisse, Jacques-Francois, 1989. "Spatial Price Policies Reconsidered," Journal of Industrial Economics, Wiley Blackwell, vol. 38(1), pages 1-18, September.
    2. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-75, September.
    3. Greenhut, M L & Ohta, H, 1972. "Monopoly Output Under Alternative Spatial Pricing Techniques," American Economic Review, American Economic Association, vol. 62(4), pages 705-13, September.
    4. Hsu, Song-ken & Mai, Chao-cheng, 1984. "Production location and random input price," Regional Science and Urban Economics, Elsevier, vol. 14(1), pages 45-62, February.
    5. Schmalensee, Richard, 1981. "Output and Welfare Implications of Monopolistic Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 71(1), pages 242-47, March.
    6. Beckmann, Martin J. & Ingene, Charles A., 1976. "The profit equivalence of mill and uniform pricing policies," Regional Science and Urban Economics, Elsevier, vol. 6(3), pages 327-329, September.
    7. Lin-Ti Tan & Song-Ken Hsu, 2000. "Production location under technology uncertainty," Environment and Planning A, Pion Ltd, London, vol. 32(3), pages 445-454, March.
    8. Greenhut,Melvin L. & Norman,George & Hung,Chao-Shun, 1987. "The Economics of Imperfect Competition," Cambridge Books, Cambridge University Press, number 9780521315647, November.
    9. Hwang, Hong & Mai, Chao-cheng, 1990. "Effects of Spatial Price Discrimination on Output, Welfare, and Location," American Economic Review, American Economic Association, vol. 80(3), pages 567-75, June.
    10. Schwartz, Marius, 1990. "Third-Degree Price Discrimination and Output: Generalizing a Welfare Result," American Economic Review, American Economic Association, vol. 80(5), pages 1259-62, December.
    11. Holahan, William L, 1975. "The Welfare Effects of Spatial Price Discrimination," American Economic Review, American Economic Association, vol. 65(3), pages 498-503, June.
    12. Martin J. Beckmann, 1976. "Spatial Price Policies Revisited," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 619-630, Autumn.
    13. Mathur, Vijay K., 1983. "Location theory of the firm under price uncertainty," Regional Science and Urban Economics, Elsevier, vol. 13(3), pages 411-428, August.
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