RANDOM PRICING BY MONOPOLISTS

This paper considers the conditions under which a monopolist might wish to randomize its pricing. When consumer demands depend on previous decisions by consumers, the magnitude of monopoly profits becomes effectively dependent on the welfare consequences of the monopoly's pricing policy. In these circumstances, differing attitudes towards price gambles between a firm and its customers can imply that randomized pricing is more profitable on average than the best deterministic pricing policy. Sufficient conditions for profitable randomizations, optimal randomizations, and incentive issues are discussed.