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Robust Monopoly Pricing

  • Dirk Bergemann
  • Karl Schlag

We consider a robust version of the classic problem of optimal monopoly pricing with incomplete information. In the robust version, the seller faces model uncertainty and only knows that the true demand distribution is in the neighborhood of a given model distribution. We characterize the optimal pricing policy under two distinct, but related, decision criteria with multiple priors: (i) maximin expected utility and (ii) minimax expected regret. The resulting optimal pricing policy under either criterion yields a robust policy to the model uncertainty. While the classic monopoly policy and the maximin criterion yield a single deterministic price, minimax regret always prescribes a random pricing policy, or equivalently, a multi-item menu policy. Distinct implications of how a monopolist responds to an increase in uncertainty emerge under the two criteria.

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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 321307000000000983.

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Date of creation: 13 Apr 2007
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Handle: RePEc:cla:levrem:321307000000000983
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