A Theory of Continuous Uncertainty Types

Achim I. Czerny, Erik Verhoef and Anming Zhang
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Achim I. Czerny: VU University Amsterdam, the Netherlands
Anming Zhang: University of British Columbia, Canada

No 15-065/VIII, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This paper distinguishes uncertainty types that differ continuously with respect to the degree to which uncertainty affects the optimal price/price markup or optimal quantity. A monopoly example is used to show that seemingly strong assumptions on functional forms can represent a wide variety of different scenarios, while (implicit) assumptions on continuous uncertainty types can lead to quite special results. Monopoly examples of the newsboy problem type are further used to show that the optimal capacity level and the optimal composition of capacity in terms of the number and size of production units depends crucially on the type of uncertainty and the employed functional forms for utilities and costs.

Keywords: Continuous uncertainty types; demand uncertainty; cost uncertainty; monopoly; newsboy problem (search for similar items in EconPapers)
JEL-codes: D42 D80 L91 (search for similar items in EconPapers)
Date: 2015-05-29
New Economics Papers: this item is included in nep-com
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Citations: View citations in EconPapers (3)

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