Pricing with uncertain customer valuations

Uncertain demand in pricing problems is often modelled using the sum of a linear price–response function and a zero–mean random variable. In this paper, we argue that the presence of uncertainty motivates the introduction of nonlinearities in the demand as a function of price, both in the risk–neutral and risk–sensitive models. We motivate our analysis by investigating the impact of uncertainty on the individual customers' valuations. We derive a family of price–response functions, parametrised by a risk sensitivity coefficient, which includes the special case of risk neutrality.