Market Research by a Monopolist: A Bayesian Analysis

Abstract

Many writers have been concerned to extend the theory of monopoly to the case where demand is uncertain. Baron (1971), Dhrymes (1964), Hadar and Hillinger (1969), Karlin and Carr (1962), Leland (1972), Mills (1959), Tisdell (1968), and Zabel (1969) have all treated aspects of this problem. Related problems have been considered by McCall (1971) and Sandmo (1971). Demand uncertainty arises in two ways. First, random effects on demand can arise from environmental factors, like the weather. Second, the monopolist may be ignorant of the way that price influences demand: in this case information on individual demand patterns is of value to the monopolist, and can be obtained through market research. A precise formalization of the process of market research, and the way in which it benefits the monopolist, is the subject of this paper. A few writers have recognized the monopolist's need for information; Clower (1959) developed a cobweb theory of the way in which market experience reduces the ignorance of the monopolist, and Tisdell (1968, pp. 175-176) noted the same source of information. However, in the present analysis it is assumed that planning is for a once-only event, so actual experience is of no benefit.