Robust Monopoly Pricing

44 Pages Posted: 8 Aug 2005 Last revised: 1 Feb 2011

See all articles by Dirk Bergemann

Dirk Bergemann

Yale University - Cowles Foundation - Department of Economics; Yale University - Cowles Foundation

Karl H. Schlag

University of Vienna - Department of Economics

Date Written: September 18, 2008

Abstract

We consider a robust version of the classic problem of optimal monopoly pricing with incomplete information. In the robust version, the seller faces model uncertainty and only knows that the true demand distribution is in the neighborhood of a given model distribution.

We characterize the optimal pricing policy under two distinct, but related, decision criteria with multiple priors: (i) maximin expected utility and (ii) minimax expected regret. The resulting optimal pricing policy under either criterion yields a robust policy to the model uncertainty.

While the classic monopoly policy and the maximin criterion yield a single deterministic price, minimax regret always prescribes a random pricing policy, or equivalently, a multi-item menu policy. Distinct implications of how a monopolist responds to an increase in uncertainty emerge under the two criteria.

Keywords: Monopoly, Optimal pricing, Robustness, Multiple priors, Regret

JEL Classification: C79, D82

Suggested Citation

Bergemann, Dirk and Schlag, Karl H., Robust Monopoly Pricing (September 18, 2008). Cowles Foundation Discussion Paper No. 1527RR. Available at SSRN: https://ssrn.com/abstract=775744

Dirk Bergemann (Contact Author)

Yale University - Cowles Foundation - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-3592 (Phone)
203-432-2128 (Fax)

HOME PAGE: http://www.econ.yale.edu/~dirk/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Karl H. Schlag

University of Vienna - Department of Economics ( email )

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria

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