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Markup Pricing and Demand Uncertainty


  • Markus Pasche

    () (University of Jena, Faculty of Economics)


In standard market theory demand and cost functions have to be known to compute optimal price or quantity responses. In case of risk or uncertainty the decisions depend on expectations, i.e. estimated parameters. Even in case of rational inference these expectations itself are uncertain, at least in case of limited cognitive abilities, perception or processing errors. Therefore ex post the expected utility maximizing behavior is not optimal in general. This paper shows that simple rules like Markup Pricing are more robust against errors and estimation risk and could outperform usual rational decision making.

Suggested Citation

  • Markus Pasche, 1997. "Markup Pricing and Demand Uncertainty," Working Paper Series B 1997-08, Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultïät, revised 01 Jun 1998.
  • Handle: RePEc:jen:jenavo:1997-08

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    References listed on IDEAS

    1. Timothy PARK & Luanne LOHR, 1996. "Wholesaler Markup Decisions Under Demand Uncertainty," Faculty Series 96-13, University of Georgia, Department of Agricultural and Applied Economics.
    2. Joaquim Oliveira Martins & Stefano Scarpetta & Dirk Pilat, 1996. "Mark-Up Ratios in Manufacturing Industries: Estimates for 14 OECD Countries," OECD Economics Department Working Papers 162, OECD Publishing.
    3. Fraser, Robert W, 1985. "Uncertainty and the Theory of Mark-up Pricing," Bulletin of Economic Research, Wiley Blackwell, vol. 37(1), pages 55-64, January.
    4. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-947, October.
    5. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
    6. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-291, June.
    7. Nishimura, Kiyohiko G, 1989. "Customer Markets and Price Sensitivity," Economica, London School of Economics and Political Science, vol. 56(222), pages 187-198, May.
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    Cited by:

    1. Markus Pasche, 1998. "An Approach to Robust Decision Making: The Rationality of Heuristic Behavior," Working Paper Series B 1998-10, Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultïät.

    More about this item


    Markup Pricing; demand uncertainty; bounded rationality; performance; robust behavior;

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies


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