UNCERTAINTY AND THE THEORY OF MARK-UP PRICING

This paper examines the role of demand uncertainty in influencing a firm's mark-up pricing decision. With no uncertainty the marginalist approach represents this mark-up as inversely and solely determined by the elasticity of demand. Here it is shown that the introduction of uncertainty does not alter this simple dependency for a risk neutral firm. For a risk averse firm, however, the mark-up is shown to depend on a range of factors, including the level of fixed and variable costs and the level of expected demand. It is argued that such variability of margin is more in keeping with observed behaviour.