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Price and quantity setting behaviors of a monopolist facing uncertain product demand Mean‐risk analyses

Price and quantity setting behaviors of a monopolist facing uncertain product demand Mean‐risk... Purpose – This paper aims at theoretical exploration of price and quantity setting behaviors of a monopolist encountering uncertain product demand within the mean‐risk frameworks. In the microeconomic literature, the relationships between price and quantity have been traditionally studied using the expected utility approach. This paper moves away from the traditional assumptions and compares various types of risk‐return approaches and explains why most of the monopoly firms follow pricing strategy instead of quantity setting strategy. Design/methodology/approach – Price setting behavior and quantity setting behavior monopoly firms were examined with endogenous target value and comparative statics were used. Findings – Comparison of various approaches reveals that risk‐averse customers might decrease purchases because of the price uncertainty or shift to other suppliers, which may explain why monopoly firms prefer their power over price setting rather than quantity setting. Research limitations/implications – The present study has introduced some testable propositions by comparing different behavioral models of price and quantity setting behaviors of a monopolist facing uncertain product demand. Practical implications – This study contributes to understanding of firm's behavior in the face of uncertainty. Originality/value – The conceptual nature of the paper makes the paper original in its contribution to the existing literature of the theory of firm. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Studies in Economics and Finance Emerald Publishing

Price and quantity setting behaviors of a monopolist facing uncertain product demand Mean‐risk analyses

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Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
1086-7376
DOI
10.1108/10867370810894701
Publisher site
See Article on Publisher Site

Abstract

Purpose – This paper aims at theoretical exploration of price and quantity setting behaviors of a monopolist encountering uncertain product demand within the mean‐risk frameworks. In the microeconomic literature, the relationships between price and quantity have been traditionally studied using the expected utility approach. This paper moves away from the traditional assumptions and compares various types of risk‐return approaches and explains why most of the monopoly firms follow pricing strategy instead of quantity setting strategy. Design/methodology/approach – Price setting behavior and quantity setting behavior monopoly firms were examined with endogenous target value and comparative statics were used. Findings – Comparison of various approaches reveals that risk‐averse customers might decrease purchases because of the price uncertainty or shift to other suppliers, which may explain why monopoly firms prefer their power over price setting rather than quantity setting. Research limitations/implications – The present study has introduced some testable propositions by comparing different behavioral models of price and quantity setting behaviors of a monopolist facing uncertain product demand. Practical implications – This study contributes to understanding of firm's behavior in the face of uncertainty. Originality/value – The conceptual nature of the paper makes the paper original in its contribution to the existing literature of the theory of firm.

Journal

Studies in Economics and FinanceEmerald Publishing

Published: Aug 1, 2008

Keywords: Monopolies; Risk analysis; Pricing policy; Organizational behaviour

References