Optimal Price Path Research Articles

Optimal Pricing of Experience Goods

A monopolist's optimal price path over time is examined for situations in which consumers initially misestimate product quality and learn about it by using the good. Information about the product is bundled with the product itself. Two very different cases are studied. In the optimistic case, consumers initially overestimate quality, and the optimal way to milk a reputation is via a declining price path followed by a jump up to a terminal price. There are no long-run effects due to initial misperceptions. In the pessimistic case, consumers underestimate quality, and the optimal way to build a reputation is to use a low introductory price followed by a higher regular price. In this case, initial misperceptions adversely affect welfare in both the short and long run.

Modeling OPEC behavior: economic and political alternatives

The predominant approach to modeling OPEC behavior depends upon the assumption that economic self-interest provides the best predictor of the cartel's price and production strategy. With rational monopoly behavior, the exogenous characteristics of the oil market determine an optimal price path for the group. But OPEC members have diverse economic as well as political goals. And uncertainty about oil market responses provides substantial leeway to argue about what is optimal. An examination of the five key OPEC price decisions since 1973 shows that an operational code of advancing political priorities on Arab-Israeli issues while deflecting security challenges better explains Saudi Arabia's decision-making than the economic optimizing approach. Moreover, no economic formula alone is consistent with Saudi behavior. The balance of internal and external forces of a political or security character on Saudi leadership suggests more of a tilt toward price hawkishness than pure considerations of economic self-interest would indicate. This tilt is reinforced by a systematic weakness on the part of the U.S. government to exercise a sustained countervailing influence on the Kingdom on behalf of moderation.

Pricing policies for a two-part exhaustible resource cartel: The case of OPEC

This paper examines pricing policies for OPEC under the assumption that the cartel is composed of a block of spender countries with large cash needs and a block of saver countries with little immediate need for cash and a lower rate of discount. The decision problem for the two-part cartel is embodied in a game-theoretic framework and the optimal bargaining solution is computed using results from the theory of cooperative games developed by Nash. The set of feasible bargaining points—and the corresponding Nash solution—is computed under two assumptions on the behavior of output shares: that they are subject to choice and that they are fixed at historical values. Our results suggest that for fixed output shares, there is little room for bargaining, and the price path approximates the optimal monopoly price path. If the shares are subject to control, optimal paths depend significantly on the relative bargaining power of each block.