Theoretical and empirical studies in strategic pricing

This dissertation provides two theoretical studies of a firm maximizing profits under demand uncertainty, these studies are preceded by a literature review on similar research; and lastly, one empirical essay where oil prices are used to measure the efficiency of OPEC as a cartel.;Chapter 1 presents a literature review comparing the models that will be developed in Chapters 2 and 3. The first half of the chapter reviews models that involve a firm's choices from amongst its price level, production output, or both variables simultaneously. The review is then extended in the second half, to incorporate the models developed in Chapter 3, to include research on storable goods and network effects.;Chapter 2 studies a two-period model in which a firm faces uncertainty in the slope of the demand function and is able to choose either the price or the production level of its good. The model is solved in two different scenarios: one in which the firm sells a storable good, hence, second period demand decreases when first period demand is high; and the other in which consumers experience a network effect. The main result is that welfare increases when the firm sets prices instead of quantity in either scenario. Also, the myopic solution generates greater first period welfare than with the dynamic outcome.;Chapter 3 examines a single firm that maximizes expected profits. Two models are analyzed, one in the spirit of the "newsboy problem" where the firm must commit to the production level before realizing the state of demand, and the other where a price or quantity combination, or a commitment to both variables must be chosen before realizing the true demand.;Conditions for the optimal price and quantity combination are found to depend on the probability of the states of demand and the marginal cost. The main result is that pre-committing to only the production level gives higher expected profits than when there is pre-commitment in the two variables, however, production levels are lower. In the model with pre-commitment in the two variables, the optimal price is constrained by the monopoly outcome of the two possible states of demand under certainty while on the other hand, the optimal quantity is constrained by the monopoly outcome of the low demand. However, under certain conditions the optimal quantity can be greater than the monopoly quantity with the high demand.;Chapter 4 provides a test for the cooperative behavior hypothesis for OPEC during the period 1974 to 2004. A modification of the Green and Porter model allows non-OPEC producers to be treated as a competitive fringe. The proposition of whether oil price fluctuations are a consequence of noncooperative behavior within the cartel or only shocks in the demand for oil is examined. A Three Stage Least Square estimation and a simplified version of the E-M algorithm are implemented after constructing a cooperative behavior variable. The main finding is that, overall, OPEC has not been effective in keeping price and quantity above competitive levels. Moreover, oil prices are significantly higher in periods of collusion among OPEC members.