Econometric Estimation of Decision Models Under Uncertainty

Abstract

Endogenous randomness of the demand curves is endemic to firms in monopolistic competition. Since the costs of resolving uncertainty are prohibitive they may be at best able to obtain some information about the demand curves. Confronted with such random demand they may pursue a policy of fixing the price and/or quantity and face the fluctuating market in such a way as to maximize expected profits. This makes the estimation of the ex ante demand curves from ex post behavior quite hopeless. The major accomplishment of this paper is the development of a method of estimating the ex ante parameters. Sensitivity of the parameter estimates to the variations in the capacity level of output, average production level, and price have been exhibited for various behavioral patterns of such firms.