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Setting price or quantity: depends on the seller is uncertain about

Author: Padmanabhan, Paddy ; Tsetlin, Ilia ; Van Zandt, TimothyINSEAD Area: Decision Sciences ; Economics and Political Science ; Economics and Political Science Series: Working Paper ; 2008/13/MKT/DS/EPS Publisher: Fontainebleau : INSEAD, 2008.Language: EnglishDescription: 29 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: We consider a seller with uncertain demand for its product. If the demand curve were certain, then setting price and setting quantity would be equivalent ways to frame the seller's problem of choosing a profit-maximising point on its demand curve. With uncertain demand, these become distinct sales mechanisms. We distinguish between uncertainty about the market size and uncertainty about the consumer's valuations. Our main results are that (i) for a given marginal cost, an increase in uncertainty about valuation favours setting quantity whereas an increase in uncertainty about market size favours setting price; (ii) keeping demand uncertainty fixed, there is a non-monotonic relationship between marginal costs and the optimal selling mechanism (setting price or quantity); and (iii) in a bilateral monopoly channel setting, channel coordination occurs except for a conflict zone in which the retailer's choice of a selling mechanism deviates from the coordinated channel selling mechanism.
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We consider a seller with uncertain demand for its product. If the demand curve were certain, then setting price and setting quantity would be equivalent ways to frame the seller's problem of choosing a profit-maximising point on its demand curve. With uncertain demand, these become distinct sales mechanisms. We distinguish between uncertainty about the market size and uncertainty about the consumer's valuations. Our main results are that (i) for a given marginal cost, an increase in uncertainty about valuation favours setting quantity whereas an increase in uncertainty about market size favours setting price; (ii) keeping demand uncertainty fixed, there is a non-monotonic relationship between marginal costs and the optimal selling mechanism (setting price or quantity); and (iii) in a bilateral monopoly channel setting, channel coordination occurs except for a conflict zone in which the retailer's choice of a selling mechanism deviates from the coordinated channel selling mechanism.

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