Document Type
Discussion Paper
Publication Date
7-1-2005
CFDP Number
1527R
CFDP Revision Date
2007-04-01
CFDP Pages
36
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.
Recommended Citation
Bergemann, Dirk and Schlag, Karl, "Robust Monopoly Pricing" (2005). Cowles Foundation Discussion Papers. 1812.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/1812