Quality Uncertainty and Price in Monopoly Markets

Abstract

This paper examines a monopoly firm's pricing strategy in a market in which consumers have varying and imprecise estimates of the quality of the firm's product. It is shown that the firm's price declines in response to an increase in the level of consumer uncertainty about quality when consumer tastes for the product are sufficiently similar and their uncertainty about quality is sufficiently small. When one or both of these conditions fails to hold, however, it is shown that the monopoly firm's price is positively related to the level of consumer uncertainty about quality. Copyright 1996 by Blackwell Publishing Ltd.