On the Theory of the Price- and Quality-Setting Firm with Uncertain Demand
Abstract:This paper examines the effects of demand uncertainty on price and product quality for the price- and quality-setting firm in the context of a general profit relation. It is shown that a firm reduces price but also improves quality in response to changes in demand risk when the expected utility function is submodular. Comparative statics predictions, when the firm is facing a simple increase in risk, depend on the specific functional forms of demand uncertainty and of the cost function and on whether the expected utility function is supermodular or submodular with respect to price and quality.
Document Type: Research Article
Affiliations: Chonnam National University, Republic of Korea
Publication date: December 1, 2003