Optimal pricing and quality choice of a monopolist under Knightian uncertainty

Takao Asano, Akihisa Shibata

Research output: Contribution to journalArticle

6 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)746-754
Number of pages9
JournalInternational Journal of Industrial Organization
Volume29
Issue number6
DOIs
Publication statusPublished - Nov 2011

Fingerprint

Costs
Stochastic models
Uncertainty
Optimal pricing
Knightian uncertainty
Monopolist
Quality choice
Entry timing
Demand uncertainty
Irreversibility
Market entry
Stochastic model
Continuous time
Pricing
Vertical product differentiation

Keywords

  • Knightian uncertainty
  • Monopoly pricing
  • Quality choice

ASJC Scopus subject areas

  • Industrial and Manufacturing Engineering
  • Industrial relations
  • Strategy and Management
  • Aerospace Engineering

Cite this

Optimal pricing and quality choice of a monopolist under Knightian uncertainty. / Asano, Takao; Shibata, Akihisa.

In: International Journal of Industrial Organization, Vol. 29, No. 6, 11.2011, p. 746-754.

Research output: Contribution to journalArticle

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