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Monopoly Pricing under Demand Uncertainty: Final Sales versus Introductory Offers

Author

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  • Volker Nocke

    () (Department of Economics, University of Pennsylvania)

  • Martin Peitz

    () (Department of Economics, University of Mannheim)

Abstract

We study rationing as a tool of the monopolist’s selling policy when demand is uncertain. Three selling policies are potentially optimal in our environment: uniform pricing, final sales, and introductory offers. Final sales consist in charging a high price initially, but then lowering the price while committing to a total capacity. Consumers with a high valuation may decide to buy at the high price since the endogenous probability of rationing is higher at the lower price. Introductory offers consist in selling a limited quantity at a low price initially, and then raising price. Those consumers with high valuations who were rationed initially at the lower price may find it optimal to buy the good at the higher price. We show that the optimal selling policy involves either uniform pricing or final sales. Introductory offers may dominate uniform pricing, but can never be optimal if the monopolist can also use final sales.

Suggested Citation

  • Volker Nocke & Martin Peitz, 2004. "Monopoly Pricing under Demand Uncertainty: Final Sales versus Introductory Offers," PIER Working Paper Archive 04-027, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  • Handle: RePEc:pen:papers:04-027
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    References listed on IDEAS

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    1. Volker Nocke & Martin Peitz, 2003. "Monopoly Pricing under Demand Uncertainty: Final Sales versus Introductory ffers," PIER Working Paper Archive 03-002, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

    More about this item

    Keywords

    Rationing; priority pricing; sales; demand uncertainty; introductory offer; price dispersion; advance purchase discount;

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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