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Additive and multiplicative uncertainty revisited: what explains the contrasting biases?


  • Ciaran Driver

    (Imperial College)

  • Tomasso Valletti

    (Imperial College & CEPR)


This note addresses the reasons why additive and multiplicative demand uncertainty produce differently signed biases in output price as compared to the certainty case in two-period monopoly models. Although the result is known in the literature different papers tend to assume one or other model without discussion, possibly because the result has hitherto been unexplained. This note gives an intuitive explanation for the result after first presenting a parsimonious review of the two models. We also discuss which, if either, of the two models is more realistic.

Suggested Citation

  • Ciaran Driver & Tomasso Valletti, 2004. "Additive and multiplicative uncertainty revisited: what explains the contrasting biases?," Microeconomics 0402012, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpmi:0402012
    Note: Type of Document - pdf; pages: 10; figures: 1

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    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D2 - Microeconomics - - Production and Organizations
    • D3 - Microeconomics - - Distribution
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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