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Spatial Monopoly Pricing in a Stochastic Environment

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Abstract

This paper reexamines the welfare implications of three pricing regimes (mill, uniform and discriminatory) for a monopoly in a stochastic environment. It con-siders a risk-averse monopolist faces two markets with stochastic and linear demands. The monopolist is assumed to commit to an irreversible price in each market before the uncertainty is resolved. Several unconventional results are shown to be triggered by the presence of demand uncertainty. The reason for the reversal of orthodox intuition is the asymmetry in the risk chacteristics of the markets and the willingness of the monopolist to trade increased level of expected pro ts for reduced risk.

Suggested Citation

  • Lin-Ti Tan & Yan-Shu Lin, 2005. "Spatial Monopoly Pricing in a Stochastic Environment," IEAS Working Paper : academic research 05-A004, Institute of Economics, Academia Sinica, Taipei, Taiwan.
  • Handle: RePEc:sin:wpaper:05-a004
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    File URL: http://www.econ.sinica.edu.tw/upload/file/05-a004.2008090210014997.pdf
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    References listed on IDEAS

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    1. Schwartz, Marius, 1990. "Third-Degree Price Discrimination and Output: Generalizing a Welfare Result," American Economic Review, American Economic Association, vol. 80(5), pages 1259-1262, December.
    2. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-875, September.
    3. Mathur, Vijay K., 1983. "Location theory of the firm under price uncertainty," Regional Science and Urban Economics, Elsevier, vol. 13(3), pages 411-428, August.
    4. Schmalensee, Richard, 1981. "Output and Welfare Implications of Monopolistic Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 71(1), pages 242-247, March.
    5. Hsu, Song-ken & Mai, Chao-cheng, 1984. "Production location and random input price," Regional Science and Urban Economics, Elsevier, vol. 14(1), pages 45-62, February.
    6. Martin J. Beckmann, 1976. "Spatial Price Policies Revisited," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 619-630, Autumn.
    7. Greenhut, M L & Ohta, H, 1972. "Monopoly Output Under Alternative Spatial Pricing Techniques," American Economic Review, American Economic Association, vol. 62(4), pages 705-713, September.
    8. Greenhut,Melvin L. & Norman,George & Hung,Chao-Shun, 1987. "The Economics of Imperfect Competition," Cambridge Books, Cambridge University Press, number 9780521315647, April.
    9. Holahan, William L, 1975. "The Welfare Effects of Spatial Price Discrimination," American Economic Review, American Economic Association, vol. 65(3), pages 498-503, June.
    10. Lin-Ti Tan & Song-Ken Hsu, 2000. "Production location under technology uncertainty," Environment and Planning A, Pion Ltd, London, vol. 32(3), pages 445-454, March.
    11. Anderson, Simon P & de Palma, Andre & Thisse, Jacques-Francois, 1989. "Spatial Price Policies Reconsidered," Journal of Industrial Economics, Wiley Blackwell, vol. 38(1), pages 1-18, September.
    12. Hwang, Hong & Mai, Chao-cheng, 1990. "Effects of Spatial Price Discrimination on Output, Welfare, and Location," American Economic Review, American Economic Association, vol. 80(3), pages 567-575, June.
    13. Beckmann, Martin J. & Ingene, Charles A., 1976. "The profit equivalence of mill and uniform pricing policies," Regional Science and Urban Economics, Elsevier, vol. 6(3), pages 327-329, September.
    14. Greenhut,Melvin L. & Norman,George & Hung,Chao-Shun, 1987. "The Economics of Imperfect Competition," Cambridge Books, Cambridge University Press, number 9780521305525, April.
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    More about this item

    Keywords

    spatial pricing; monopoly; demand uncertainty;

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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