CFDP 1527R

Robust Monopoly Pricing

Author(s): 

Publication Date: July 2005

Revision Date: April 2007

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.

Keywords: 

Monopoly, Optimal pricing, Robustness, Multiple priors, Regret

JEL Classification Codes:  C79, D82