Events

Authors:

• Lin ZHOU
  City University of Hong Kong

• Jim BERGIN
  City University of Hong Kong

In the standard monopoly model, the optimizing monopolist is assumed to know the market demand function, and sets the price to maximize profit. If the demand function is stochastic, perturbed according to some aggregate shock, then it is optimal for the monopolist to set a quantity that maximizes the expected profit. In the case where further information is available so that aggregate demand is decomposed into the sum of individual demands, the monopolist can again calculate the expected demand curve and choose quantity to maximize expected profit. But is it optimal for the monopolist to do so? In general the answer is no: the monopolist can actually do better by first soliciting demands from buyers and using such information in the pricing decision. From the revelation principle, the pricing rule should be designed so that the buyers have an incentive to reveal their true demands. Using the techniques developed in the auction literature, we study the optimal monopolistic pricing policy in this setting. With increasing marginal costs, we show that the Myerson rule for an optimal auction is also optimal here. However, we show that the Myerson rule is generally not optimal with decreasing marginal costs. We then discuss the optimal pricing rule for some canonical cases.