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Optimal pricing and quality choice of a monopolist under Knightian uncertainty

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  • Asano, Takao
  • Shibata, Akihisa

Abstract

This paper analyzes a simple vertical product differentiation model with demand uncertainty and derives a risk neutral monopolist's optimal market entry timing, her optimal pricing and optimal quality choice by incorporating Knightian uncertainty, irreversibility, and flexibility in quality-enhancing investment into a continuous-time stochastic model. It is shown that an increase in Knightian uncertainty induces decreases in the optimal price, the optimal quality, and the value of undertaking the quality-enhancing investment by the monopolist. The social optimal entry timing, pricing and quality are also analyzed.

Suggested Citation

  • Asano, Takao & Shibata, Akihisa, 2011. "Optimal pricing and quality choice of a monopolist under Knightian uncertainty," International Journal of Industrial Organization, Elsevier, vol. 29(6), pages 746-754.
    • Handle: RePEc:eee:indorg:v:29:y:2011:i:6:p:746-754
    DOI: 10.1016/j.ijindorg.2011.04.002
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    5. Tamini, Lota D., 2012. "Optimal quality choice under uncertainty on market development," MPRA Paper 40845, University Library of Munich, Germany.

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    More about this item

    Keywords

    Monopoly pricing; Quality choice; Knightian uncertainty;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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