COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1527R Robust Monopoly Pricing Dirk Bergemann and Karl Schlag July 2005 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: C79, D82 |
