Robust Monopoly Pricing

Dirk Bergemann and Karl Schlag

No 1527R, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We consider a robust version of the classic problem of optimal monopoly pricing with incomplete information. In the robust version of the problem the seller only knows that demand will be in a 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. 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. The resulting optimal pricing policy under either criterion is robust to the model uncertainty. Finally we derive distinct implications of how a monopolist responds to an increase in ambiguity under each criterion.

Keywords: Monopoly; Optimal pricing; Robustness; Multiple priors; Regret (search for similar items in EconPapers)
JEL-codes: C79 D82 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2005-07, Revised 2007-04
New Economics Papers: this item is included in nep-ind, nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Related works:
Chapter: Robust Monopoly Pricing (2012)
Journal Article: Robust monopoly pricing (2011)
Working Paper: Robust Monopoly Pricing (2008)
Working Paper: Robust Monopoly Pricing (2007)
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