Pricing of a Risk Averse Monopoly in the Presence of Stochastic Demand

Abstract

In the paper, we investigate the pricing behavior of a risk averse monopoly. Since the focus is on the risk averse attitude of the firm, we ignore cost in our model. Demand is considered to be stochastic demand: as price decreases, the expected number of customers increases, but it has a variation. Although demand is uncertain, it relates to the aggregation method of individual demands and the individual demand has the usual form. In our framework a risk neutral (or profit maximizer) monopoly does not change the product’s price as the number of clients increases. On product markets the risk averse monopoly with DARA utility function always increases the price as the number of clients grows, but in insurance markets the implication can be the opposite: the price of insurance may decrease as the number of clients increases.