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Monopoly and demand uncertainty

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  • Kultti, Klaus
Abstract
We develop a formal framework to analyse a monopoly’s problem when demand is determined by a Poisson-distribution and the valuations of the buyers are draws from a common distribution. The buyers have unit demand, and the good in question is discrete. The monopoly has to make its quantity and pricing decisions before demand is realised. We determine sufficient conditions for the monopoly’s pricing decision to be unique, and we demonstrate the difference to the planner’s problem by numerical examples. We also study an economy with a fixed number of buyers assuming that the valuations are draws from the uniform distribution. When the economy grows in the limit one recovers the standard case of a monopoly with linear demand and constant marginal costs.

Suggested Citation

  • Kultti, Klaus, 2021. "Monopoly and demand uncertainty," Research in Economics, Elsevier, vol. 75(4), pages 354-364.
    • Handle: RePEc:eee:reecon:v:75:y:2021:i:4:p:354-364
    DOI: 10.1016/j.rie.2021.10.001
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    References listed on IDEAS

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    1. Harris, Milton & Raviv, Artur, 1981. "A Theory of Monopoly Pricing Schemes with Demand Uncertainty," American Economic Review, American Economic Association, vol. 71(3), pages 347-365, June.
    2. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-291, June.
    3. Gale, Ian L & Holmes, Thomas J, 1993. "Advance-Purchase Discounts and Monopoly Allocation of Capacity," American Economic Review, American Economic Association, vol. 83(1), pages 135-146, March.
    4. Meyer, Robert A, 1975. "Monopoly Pricing and Capacity Choice under Uncertainty," American Economic Review, American Economic Association, vol. 65(3), pages 326-337, June.
    5. Edwin S. Mills, 1959. "Uncertainty and Price Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 73(1), pages 116-130.
    6. James D. Dana Jr., 1999. "Equilibrium Price Dispersion Under Demand Uncertainty: The Roles of Costly Capacity and Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 632-660, Winter.
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    Cited by:

    1. Guerrazzi, Marco & Candido, Giuseppe, 2023. "The determination of the price of capital goods: A differential game approach," MPRA Paper 119118, University Library of Munich, Germany.

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    More about this item

    Keywords

    Finite economy; Uncertain demand; Monopoly;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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