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

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.

Citation

Guru‐Gharana, K.K., Rahman, M. and Parayitam, S. (2008), "Price and quantity setting behaviors of a monopolist facing uncertain product demand: Mean‐risk analyses", Studies in Economics and Finance, Vol. 25 No. 3, pp. 175-195. https://doi.org/10.1108/10867370810894701