Differential pricing with consumers’ valuation uncertainty by a monopoly

Traditional price discrimination of a monopoly depends on the knowledge of consumers’ valuation (as measured by willingness-to-pay or WTP). Information about consumer uncertainty on WTP, however, has not been considered explicitly as a way of segmentation for pricing purpose. Based on analytical modeling results at the individual level and simulations of survey data at the segment level, this paper proposes a new way of segmentation based on consumers’ valuation uncertainty (as measured by the range of WTP). Highest profit is attained when both valuation and valuation uncertainty are considered for optimal pricing. Moreover, compared to a segment with low valuation uncertainty, a segment with higher valuation uncertainty tends to have a flatter demand curve. Therefore, if the floor WTP has a non-negative correlation with the range of WTP, high valuation uncertainty leads to a higher optimal price as compared to low valuation uncertainty.