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Robust Monopoly Pricing

We consider a robust version of the classic problem of optimal monopoly pricing with incomplete information. In the robust version of the problem the seller only knows that demand will be in a 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. 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. The resulting optimal pricing policy under either criterion is robust to the model uncertainty. Finally we derive distinct implications of how a monopolist responds to an increase in ambiguity under each criterion.

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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1527R.

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Length: 36 pages
Date of creation: Jul 2005
Date of revision: Apr 2007
Handle: RePEc:cwl:cwldpp:1527r
Contact details of provider: Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
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Order Information: Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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  30. Prasad Kislaya, 2003. "Non-robustness of some economic models," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 3(1), pages 1-9, May.
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