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