Reference no: EM133134081

Pricing Under Uncertainty

a) You sell fashion goods to consumers. Your firm's market research has determined that all of your consumers have the same willingness to pay, but there is considerable uncertainty about what it is. It is believed that it is either $150, $200, or $225, each with equal probability.

Reservation Price Probability

150 1/3

200 1/3

225 1/3

You can set a price at the start of the season, p1, and another at the end of the season, p2. What prices p1 and p2 maximize your profit? There are 100 consumers in total. (You may as- sume that consumers are not forward looking. The problem is much more difficult otherwise.)

b) Same problem as in (a) but now assume:

Reservation Price Probability

150 1/10

200 2/10

225 5/10

275 2/10

You can set a price at the start of the season, p1, and another at the end of the season, p2. What prices p1 and p2 maximize your profit? There are 100 consumers in total. (You may as- sume that consumers are not forward looking. The problem is much more difficult otherwise.)

c) Compare your answers in (a) and (b) and speculate on why the answers differ