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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, 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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File URL: http://cowles.econ.yale.edu/P/cd/d15a/d1527-rr.pdf
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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1527RR.

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Length: 43 pages
Date of creation: Jul 2005
Date of revision: Sep 2008
Handle: RePEc:cwl:cwldpp:1527rr
Contact details of provider: Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.econ.yale.edu/

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Order Information: Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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  19. Oechssler, Joerg & Frank Riedel, 1999. "Evolutionary Dynamics on Infinite Strategy Spaces," Discussion Paper Serie A 606, University of Bonn, Germany.
  20. Ilya Segal, 2003. "Optimal Pricing Mechanisms with Unknown Demand," American Economic Review, American Economic Association, vol. 93(3), pages 509-529, June.
  21. Chamberlain, Gary, 2000. "Econometrics and decision theory," Journal of Econometrics, Elsevier, vol. 95(2), pages 255-283, April.
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  23. Stoye, Jörg, 2011. "Axioms for minimax regret choice correspondences," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2226-2251.
  24. Richard Engelbrecht-Wiggans & Elena Katok, 2007. "Regret in auctions: theory and evidence," Economic Theory, Springer, vol. 33(1), pages 81-101, October.
  25. Linhart, P. B. & Radner, R., 1989. "Minimax-regret strategies for bargaining over several variables," Journal of Economic Theory, Elsevier, vol. 48(1), pages 152-178, June.
  26. Daniel Ellsberg, 2000. "Risk, Ambiguity and the Savage Axioms," Levine's Working Paper Archive 7605, David K. Levine.
  27. Jörg Stoye, 2011. "Statistical decisions under ambiguity," Theory and Decision, Springer, vol. 70(2), pages 129-148, February.
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  29. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
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