Article ID: | iaor20121546 |
Volume: | 136 |
Issue: | 1 |
Start Page Number: | 151 |
End Page Number: | 160 |
Publication Date: | Mar 2012 |
Journal: | International Journal of Production Economics |
Authors: | Vera Jorge, Ferrer Juan-Carlos, Oyarzn Diego |
Keywords: | demand, forecasting: applications, risk |
Good demand estimates are the key to effective pricing decision‐making. However, they are subject to a high degree of uncertainty due to various factors that are unpredictable or difficult to model, thus making pricing decisions risky. This research provides a simple proposal for a robust optimization methodology that incorporates both demand uncertainty and the decision maker's degree of risk aversion. Uncertainty is explicitly considered for two coefficients of a linear demand function, price expressions are derived, and a criterion is proposed for defining the degree of risk aversion. The resulting model is also applied to an exponential demand case to better reflect a more realistic retail setting.