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Some Thoughts On Pricing, Part IV

October 30th, 2008 No comments

On the other hand, if instead of making the variance or standard deviation tight we allow it to be relaxed, the same Gaussian distribution becomes more and more like a uniform distribution over the entire real domain.  If there is one other company competing against me, and it's a real coin toss regarding how F1 will price, it pays for me to price above the mean given my belief of the mean and standard deviation.  Recall that for a uniform distribution expected profit looks like an inverted parabola, and great uncertainty around ten pesos will occasion my expected profit to look just similarly so.

Something akin happens when there are 2, 3 companies competing against me, except the maximum of this "inverted parabola" (it actually isn't parabolic, but sort of) is closer to 10 (the mean) and my maximum expected profit is lesser.  When there is a lot of competition pricing all over the place it really becomes a coin toss as to where I should price, as maximum expected profit will be more or less the same regardless (in fact, close to zero).

The graphs (soon-coming) perhaps will make this more obvious.