Monopoly pricing with limited demand information

  • Serkan S Eren
  • Costis Maglaras
Research Article
Part of the following topical collections:
  1. An Associated Publication of the INFORMS Revenue Management and Pricing Section – CONFERENCE ISSUE

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.

Keywords

robust pricing competitive analysis regret revenue mangement 

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Copyright information

© Palgrave Macmillan, a division of Macmillan Publishers Ltd 2010

Authors and Affiliations

  • Serkan S Eren
    • 1
  • Costis Maglaras
  1. 1.Barclays Capital Inc.New YorkUSA

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