Second-best pricing with stochastic demand

Abstract

Second-best pricing rules are developed for a monopoly firm facing random demands and using the welfare function. Situations of uncertain demand when prices are set before the demand level is known can result in an excess of demand and require service to be rationed. Customer behavior in specific cases is examined. Customers who value service most are found to be served first under both second-best optimal prices and the monopolistic rule. Random rationing by price and inefficient nonprice rationing, however, are shown to result in inefficient distribution of service. 21 references.