Optimal pricing and quality choice of a monopolist under Knightian uncertainty

Takao Asano and Akihisa Shibata

International Journal of Industrial Organization, 2011, vol. 29, issue 6, 746-754

Abstract: This paper analyzes a simple vertical product differentiation model with demand uncertainty and derives a risk neutral monopolist's optimal market entry timing, her optimal pricing and optimal quality choice by incorporating Knightian uncertainty, irreversibility, and flexibility in quality-enhancing investment into a continuous-time stochastic model. It is shown that an increase in Knightian uncertainty induces decreases in the optimal price, the optimal quality, and the value of undertaking the quality-enhancing investment by the monopolist. The social optimal entry timing, pricing and quality are also analyzed.

Keywords: Monopoly pricing; Quality choice; Knightian uncertainty (search for similar items in EconPapers)
JEL-codes: D81 L12 L15 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:29:y:2011:i:6:p:746-754

DOI: 10.1016/j.ijindorg.2011.04.002

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