Setting Price Or Quantity: Depends On What The Seller Is Uncertain
The authors 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-maximizing point on its demand curve. With uncertain demand, these become distinct sales mechanisms. The authors distinguished between uncertainty about market size and uncertainty about consumer's valuation. The main result are that (1)for a given marginal cost an increase in uncertainty about valuation favours setting quantity(2)keeping demand uncertainty fixed there is a nonmonotonic relationship between marginal cost and optimal selling mechanism and (3) in a bilateral monopoly channel setting except for a conflict zone.