Pricing as a risky choice: Uncertainty and survival in a monopoly market
Roy (Safety First and the Holding of Assets, 1952) argues that decisions under uncertainty motivate firms to avoid bankruptcy. In this paper, the authors ask about the behaviour of a monopolist who pre-commits to price when she has only probabilistic knowledge about demand. They argue that pricing in order to maximise the likelihood of survival explains anomalies such as inelastic pricing, why the firm takes on more risk as gains become less likely, and asymmetric responses to demand and cost changes. When demand is a linear demand, the monopolist's response to an increase in the marginal cost is similar to the response when mark-up pricing is used. That is, there is a one-to-one relationship between an increase of the marginal cost and an increase in price.
Volume (Year): 9 (2015)
Issue (Month): ()
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- Schmidt, Klaus M., 1996.
"Managerial Incentives and Product Market Competition,"
CEPR Discussion Papers
1382, C.E.P.R. Discussion Papers.
- Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics 19772, University of Munich, Department of Economics.
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- van Dalen, Jan & Thurik, Roy, 1998. "A model of pricing behavior: An econometric case study," Journal of Economic Behavior & Organization, Elsevier, vol. 36(2), pages 177-195, August.
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- Klaus M. Schmidt, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 191-213. Full references (including those not matched with items on IDEAS)
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