CFDP 1527

Robust Monopoly Pricing: The Case of Regret

Author(s): 

Publication Date: July 2005

Pages: 51

Abstract: 

We consider a robust version of the classic problem of optimal monopoly pricing with incomplete information. The robust version of the problem is distinct in two aspects: (i) the seller minimizes regret rather than maximizes revenue, and (ii) the seller only knows that the true distribution of the valuations is in a neighborhood of a given model distribution.

We characterize the robust pricing policy as the solution to a minimax problem for small and large neighborhoods. In contrast to the classic monopoly policy, which is a single deterministic price, the robust policy is always a random pricing policy, or equivalently, a multi-item menu policy. The responsiveness of the robust policy to an increase in risk is determined by the curvature of the static profit function.

Keywords: 

Monopoly, Optimal Pricing, Regret, Robustness

JEL Classification Codes:  C79, D82