Pricing with Limited Knowledge of Demand

27 Pages Posted: 2 Nov 2015 Last revised: 2 Dec 2015

See all articles by Maxime Cohen

Maxime Cohen

Desautels Faculty of Management, McGill University

Georgia Perakis

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Robert S. Pindyck

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2015

Abstract

How should a firm price a new product for which little is known about demand? We propose a simple pricing rule: the firm only estimates the maximum price it can charge and still expect to sell at least some units, and then sets price as though the actual demand curve were linear. We show that if the true demand curve is one of many commonly used demand functions, or even if it is a more complex function, and if marginal cost is known and constant, the firm can expect its profit to be close to what it would earn if it knew the true demand curve. We derive analytical performance bounds for a variety of demand functions, and calculate expected profit performance for randomly generated demand curves.

Suggested Citation

Cohen, Maxime and Perakis, Georgia and Pindyck, Robert S., Pricing with Limited Knowledge of Demand (October 2015). NBER Working Paper No. w21679, Available at SSRN: https://ssrn.com/abstract=2684963

Maxime Cohen (Contact Author)

Desautels Faculty of Management, McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Georgia Perakis

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-565
Cambridge, MA 02142
United States

Robert S. Pindyck

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02139
United States
617-253-6641 (Phone)
617-258-6855 (Fax)

HOME PAGE: http://web.mit.edu/rpindyck/www/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
24
Abstract Views
385
PlumX Metrics