Price or quantity setting under uncertain demand and capacity constraints: An examination of the profits |
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Authors: | Enrico Pennings |
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Institution: | (1) Present address: Faculty of Economics, Universitat Pompeu Fabra, Ramon Trias Fargas 25-27, 08005 Barcelona, Spain |
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Abstract: | This article considers price formation and quantity setting of a capacity-constrained risk-neutral firm facing uncertain demand. It is shown that the optimal price of a price-setting risk-neutral monopolist decreases with demand uncertainty. With a strictly convex demand function expected profits increase with uncertainty for a quantity-setting monopolist whereas expected profits decrease for a price-setting monopolist. Furthermore, similar results on the effect of uncertainty are derived for a differentiated goods industry. |
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Keywords: | pricing capacity uncertainty |
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