Pricing of a Risk Averse Monopoly in the Presence of Stochastic Demand ()
ABSTRACT
In the paper, we investigate the pricing behavior of a risk averse
monopoly. Since the focus is on the risk averse attitude of the firm, we ignore
cost in our model. Demand is considered to be stochastic demand: as price decreases, the expected number of customers
increases, but it has a variation. Although demand is uncertain, it
relates to the aggregation method of individual demands and the individual
demand has the usual form. In our framework a risk neutral (or profit maximizer)
monopoly does not change the product’s price as the number of clients
increases. On product markets the risk averse monopoly with DARA utility
function always increases the price as the number of clients grows, but in
insurance markets the implication can be the opposite: the price of insurance
may decrease as the number of clients increases.
Share and Cite:
Ágoston, K. (2015) Pricing of a Risk Averse Monopoly in the Presence of Stochastic Demand.
Theoretical Economics Letters,
5, 217-224. doi:
10.4236/tel.2015.52026.
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