Robust Monopoly Pricing

Dirk Bergemann and Karl Schlag

No 1527R2, 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, 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 (search for similar items in EconPapers)
JEL-codes: C79 D82 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2005-07, Revised 2008-09
New Economics Papers: this item is included in nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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