ON THE BEHAVIOR OF THE MONOPOLISTIC FIRM UNDER DEMAND UNCERTAINTY

Abstract

This paper is concerned with the behavior of a monopolistic firm with production flexibility (in the sense of Turnovsky [15]) under demand uncertainty. Effects of "disequilibria" phenomena such as inventory holding & unsatisfied demand are explicitly analyzed.
Main results are as follows:
(1) Even if the firm is able to revise its production plan after learning the true state, it will not necessarily determine the production level so as to equate supply to demand (Section 3).
(2) The behavior of a risk-neutral firm under uncertainty will in general differ from the behavior of the risk-neutral firm under certainty (Section 4). And the behavior of a risk-averse firm under uncertainty will in general differ from the behavior of a risk-neutral firm under uncertainty (Section 5).
The direction of these responses will depend upon the nature of demand & cost functions these firms face (Section 4, Section 5).