Price and quantity setting behaviors of a monopolist facing uncertain product demand

Abstract

PurposeThis 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/approachPrice setting behavior and quantity setting behavior monopoly firms were examined with endogenous target value and comparative statics were used.FindingsComparison 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/implicationsThe 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 implicationsThis study contributes to understanding of firm's behavior in the face of uncertainty.Originality/valueThe conceptual nature of the paper makes the paper original in its contribution to the existing literature of the theory of firm.