Risk averse retail pricing with robust demand forecasting

Risk averse retail pricing with robust demand forecasting

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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: , ,
Keywords: demand, forecasting: applications, risk
Abstract:

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.

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