Monopoly pricing with limited demand information

Authors: Eren, Serkan S; Maglaras, Costis

Source: Journal of Revenue and Pricing Management, Volume 9, Numbers 1-2, 3 January 2010 , pp. 23-48(26)

Publisher: Palgrave Macmillan

Buy & download fulltext article:

OR

Price: $43.00 plus tax (Refund Policy)

Abstract:

Traditional monopoly pricing models assume that firms have full information about the market demand and consumer preferences. In this article, we study a prototypical monopoly pricing problem for a seller with limited market information and different levels of demand learning capability under relative performance criterion of the competitive ratio (CR). We provide closed-form solutions for the optimal pricing policies for each case and highlight several important structural insights. We note the following: (1) From the firm's viewpoint the worst-case operating conditions are when it faces a homogeneous market where all customers value the product equally, but where the specific valuation is unknown. In cases with partial demand information, the worse case cumulative willingness-to-pay distribution becomes piecewise-uniform as opposed to a point mass. (2) Dynamic (skimming) pricing arises naturally as a hedging mechanism for the firm against the two principal risks that it faces: first, the risk of foregoing revenue from pricing too low, and second, the risk of foregoing sales from pricing too high. And, (3) even limited learning, for example market information at a few price points, leads to significant performance gains.

Document Type: Research Article

DOI: http://dx.doi.org/10.1057/rpm.2009.41

Publication date: January 3, 2010

Related content

Key

Free Content
Free content
New Content
New content
Open Access Content
Open access content
Subscribed Content
Subscribed content
Free Trial Content
Free trial content

Text size:

A | A | A | A
Share this item with others: These icons link to social bookmarking sites where readers can share and discover new web pages. print icon Print this page