IDEAS home Printed from https://ideas.repec.org/p/zbw/ifwedp/201553.html
   My bibliography  Save this paper

Pricing as a risky choice: Uncertainty and survival in a monopoly market

Author

Listed:
  • Andersen, Per
  • Vetter, Henrik

Abstract

Roy (Safety First and the Holding of Assets, 1952) argues that decisions under uncertainty motivate firms to avoid bankruptcy. In this paper the authors ask about the behaviour of a monopolist who pre-commits to price when she has only probabilistic knowledge about demand. They argue that pricing in order to maximise the likelihood of survival explains anomalies such as inelastic pricing, why the firm takes on more risk as gains become less likely, and asymmetric responses to demand and cost changes. When demand is a linear demand, the monopolist's response to an increase in the marginal cost is similar to the response when mark-up pricing is used. That is, there is a one-to-one relationship between an increase of the marginal cost and an increase in price.

Suggested Citation

  • Andersen, Per & Vetter, Henrik, 2015. "Pricing as a risky choice: Uncertainty and survival in a monopoly market," Economics Discussion Papers 2015-53, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:201553
    as

    Download full text from publisher

    File URL: http://www.economics-ejournal.org/economics/discussionpapers/2015-53
    Download Restriction: no
    File URL: https://www.econstor.eu/bitstream/10419/112707/1/83024798X.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Klaus M. Schmidt, 1997. "Managerial Incentives and Product Market Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(2), pages 191-213.
    2. Arthur Hau, 2004. "Theory of the firm facing uncertain demand revisited," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(2), pages 457-464, August.
    3. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    4. Allen, Beth & Hellwig, Martin, 1986. "Price-Setting Firms and the Oligopolistic Foundations of Perfect Competition," American Economic Review, American Economic Association, vol. 76(2), pages 387-392, May.
    5. Unknown, 1986. "Letters," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 1(4), pages 1-9.
    6. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-741, September.
    7. Lester G. Telser, 1955. "Safety First and Hedging," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 23(1), pages 1-16.
    8. van Dalen, Jan & Thurik, Roy, 1998. "A model of pricing behavior: An econometric case study," Journal of Economic Behavior & Organization, Elsevier, vol. 36(2), pages 177-195, August.
    9. Day, Richard H & Aigner, Dennis J & Smith, Kenneth R, 1971. "Safety Margins and Profit Maximization in the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 79(6), pages 1293-1301, Nov.-Dec..
    10. Andersen, Per & Nielsen, Martin, 2013. "Inelastic sports pricing and risk," Economics Letters, Elsevier, vol. 118(2), pages 262-264.
    11. repec:bla:scotjp:v:49:y:2002:i:3:p:336-55 is not listed on IDEAS
    12. Fabiani, Silvia & Loupias, Claire & Martins, Fernando & Sabbatini, Roberto (ed.), 2007. "Pricing Decisions in the Euro Area: How Firms Set Prices and Why," OUP Catalogue, Oxford University Press, number 9780195309287.
    13. Baron, David P, 1971. "Demand Uncertainty in Imperfect Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 12(2), pages 196-208, June.
    14. Arzac, Enrique R, 1976. "Profits and Safety in the Theory of the Firm under Price Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(1), pages 163-171, February.
    15. Asplund, Björn Marcus, 2007. "A Test of Profit Maximization," CEPR Discussion Papers 6177, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Xin Meng & Zilin Tang & Leonard F. S. Wang, 2023. "Sport tickets pricing strategy with home team's crowd effect," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(2), pages 839-847, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andersen, Per & Vetter, Henrik, 2015. "Pricing as a risky choice: Uncertainty and survival in a monopoly market," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 9, pages 1-22.
    2. Christoph Engel & Michael Kurschilgen, 2011. "Fairness Ex Ante and Ex Post: Experimentally Testing Ex Post Judicial Intervention into Blockbuster Deals," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 8(4), pages 682-708, December.
    3. Antonides, Gerrit & Kroft, Maaike, 2005. "Fairness judgments in household decision making," Journal of Economic Psychology, Elsevier, vol. 26(6), pages 902-913, December.
    4. Attema, Arthur E. & Brouwer, Werner B.F., 2012. "A test of independence of discounting from quality of life," Journal of Health Economics, Elsevier, vol. 31(1), pages 22-34.
    5. Christoph Bühren & Thorben C. Kundt, 2013. "Worker or Shirker – Who Evades More Taxes? A Real Effort Experiment," MAGKS Papers on Economics 201326, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    6. Azar, Ofer H. & Yosef, Shira & Bar-Eli, Michael, 2015. "Restaurant tipping in a field experiment: How do customers tip when they receive too much change?," Journal of Economic Psychology, Elsevier, vol. 50(C), pages 13-21.
    7. Jacobs, Martin & Requate, Till, 2016. "Bertrand-Edgeworth markets with increasing marginal costs and voluntary trading: Experimental evidence," Economics Working Papers 2016-01, Christian-Albrechts-University of Kiel, Department of Economics.
    8. Harel Alon & Procaccia Yuval & Ritov Ilana, 2017. "On the Economic Effects of Disobeyed Regulation in Employment Law," Review of Law & Economics, De Gruyter, vol. 13(2), pages 1-24, July.
    9. James Alm & Antoine Malézieux, 2021. "40 years of tax evasion games: a meta-analysis," Experimental Economics, Springer;Economic Science Association, vol. 24(3), pages 699-750, September.
    10. Kuo-Hwa Chang & Michael Nayat Young, 2019. "Portfolios Optimizations of Behavioral Stocks with Perception Probability Weightings," Annals of Economics and Finance, Society for AEF, vol. 20(2), pages 817-845, November.
    11. Bruno S. Frey & David A. Savage & Benno Torgler, 2011. "Behavior under Extreme Conditions: The Titanic Disaster," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 209-222, Winter.
    12. Ashok Chakravarti, 2012. "Institutions, Economic Performance and the Visible Hand," Books, Edward Elgar Publishing, number 14751.
    13. Konow, James, 1996. "A positive theory of economic fairness," Journal of Economic Behavior & Organization, Elsevier, vol. 31(1), pages 13-35, October.
    14. Fortin, Bernard & Lacroix, Guy & Villeval, Marie-Claire, 2007. "Tax evasion and social interactions," Journal of Public Economics, Elsevier, vol. 91(11-12), pages 2089-2112, December.
    15. Kai Barron, 2021. "Belief updating: does the ‘good-news, bad-news’ asymmetry extend to purely financial domains?," Experimental Economics, Springer;Economic Science Association, vol. 24(1), pages 31-58, March.
    16. Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(1), pages 73-92.
    17. Wen‐Qiang Bian & L. Robin Keller, 1999. "Chinese and Americans Agree on What Is Fair, but Disagree on What Is Best in Societal Decisions Affecting Health and Safety Risks," Risk Analysis, John Wiley & Sons, vol. 19(3), pages 439-452, June.
    18. Elsby, Michael W.L., 2009. "Evaluating the economic significance of downward nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 154-169, March.
    19. Congdon, William J. & Kling, Jeffrey R. & Mullainathan, Sendhil, 2009. "Behavioral Economics and Tax Policy," National Tax Journal, National Tax Association;National Tax Journal, vol. 62(3), pages 375-386, September.
    20. Hong Luo & Julie Holland Mortimer, 2017. "Copyright Enforcement: Evidence from Two Field Experiments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(2), pages 499-528, June.

    More about this item

    Keywords

    monopoly; uncertainty; safety-first principle;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:ifwedp:201553. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/iwkiede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.