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Nenad Kos (Bocconi University) "Robust Product Design and Pricing"
Bocconi University, Italy
Authors: Nenad Kos, Kyungmin Kim
Abstract: We study the problem of product design and pricing by a monopolist who has no information about the distribution of consumers’ horizontal tastes and maximizes her profit under the worst-case scenario. We show that her optimal strategy takes a strikingly simple form of dividing the taste space into a finite number of equal-length intervals and serving consumers on a randomly chosen interval. We obtain this result by studying the dual problem of finding a distribution of consumers’ tastes that minimizes the seller’s profit. Our analysis extends to the case where the seller can design several varieties of the product.
JEL Classification: D42, D80, L12
Keywords: Hotelling, product design, robust pricing, profit guarantee, circular city, product variety
Full Text: Robust Product Design and Pricing
