A technical note on the derivation of the Bayesian-Ramsey pricing rule

Herman B. Leonard and William B. Tye

Transportation Research Part B: Methodological, 1986, vol. 20, issue 1, 41-47

Abstract: "Bayesian-Ramsey pricing" has been offered to correct for the undue sensitivity of the Baumol and Bradford formulation of Ramsey pricing to relatively small errors in the highly uncertain least-squares estimates of the relevant demand elasticities. This paper provides a derivation of the Ramsey pricing equation under uncertainty and of the required expectations for the case of linear demand curve under uncertainty characterized by a truncated normal posterior distribution. Such a posterior would arise from normal sample data in combination with an improper prior. These equations were used in a previously published paper in this journal to evaluate the Bayesian approach.

Date: 1986
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