UNCERTAINTY AND PRICE THEORY*
By EDWIN S. MILLS
I. Introduction, 116. -II. Cost and uncertain demand, 117. -III. Alternative specifications, 118.- IV. Single period horizon: equilibrium conditions, 119.
-V. The fundamental theorem, 122. - VI. Example: constant marginal cost,
linear riskless demand, and rectangular distribution, 124. - VII. Rising marginal
cost, 126. - VIII. Falling marginal cost, 127. - IX. Multi-period horizon, 128.-
X. Conclusion, 129.
I. INTRODUCTION
Most economists would probably agree that uncertainty of some
kind should be taken into account in analyzing firms'price and output
policies. But here the consensus ends. There is much less agreement
as to the amount of information that firms possess, how uncertain
knowledge is described and organized, and what decision criterion is
employed in making decisions. Indeed, even though many economists
have strong impressions as to the effect of uncertainty on firms' price
and output policies, there is remarkably little formal analysis in the
literature concerning effects on specific decisions of the use of various
decision processes in uncertain situations. There is considerable
literature on decision taking under uncertainty, but it is largely concerned with the internal structure of the handful of consistent and
more or less plausible theories available rather than with the effect
of the various decision criteria on the decisions taken. Clearly it
would be useful to know which decision processes lead to decisions
which are systematically different from those predicted by a theory
which ignores the presence of uncertainty, and in what way they are
different.