CFDP 1527R2

Robust Monopoly Pricing

Author(s): 

Publication Date: July 2005

Revision Date: April 2007September 2008

Pages: 43

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

JEL Classification Codes:  C79, D82

See CFP: 1341