Demand Uncertainty, Forecasting, and Monopolistic Equilibrium

Abstract

This paper considers the role of forecasting and data-processing in a monopolistic firm facing uncertain demand. The monopoly is considered in a dynamic multiperiod model. Intertemporal links are determined by expenditures on demand analysis in a present period and benefits from this activity (i.e., smaller variance of the prediction error) in future periods. Assuming that the monopoly maximizes its total discounted expected utility from the profit in indefinite time, the outcomes we derive come under the following headings. First, we show that the optimal forecasting strategy is stationary. Second, based on the analysis of the steady state, we find that only monopolies managed by risk-averse individuals are concerned about demand forecasts. Third, we examine the existence and the uniqueness of the optimal demand-forecasting strategy in risk-averse monopolistic firms. Finally, we investigate the welfare effects of demand-forecasting in the risk-averse monopoly. The results indicate that demand-forecasting in a monopolistic firm always increases the expected value of the producer s surplus, but its impact on the expected deadweight loss and the expected consumer surplus cannot be unambiguously determined and depends on the properties of stochastic demand.