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Optimal pricing and quality choice of a monopolist under Knightian uncertainty

Listed author(s):
  • Asano, Takao
  • Shibata, Akihisa

This paper analyzes a simple vertical product differentiation model with demand uncertainty and derives a risk neutral monopolist's optimal market entry timing, her optimal pricing and optimal quality choice by incorporating Knightian uncertainty, irreversibility, and flexibility in quality-enhancing investment into a continuous-time stochastic model. It is shown that an increase in Knightian uncertainty induces decreases in the optimal price, the optimal quality, and the value of undertaking the quality-enhancing investment by the monopolist. The social optimal entry timing, pricing and quality are also analyzed.

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File URL: http://www.sciencedirect.com/science/article/pii/S0167718711000348
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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 29 (2011)
Issue (Month): 6 ()
Pages: 746-754

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Handle: RePEc:eee:indorg:v:29:y:2011:i:6:p:746-754
DOI: 10.1016/j.ijindorg.2011.04.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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