Pricing with uncertain customer valuations
Abstract: Uncertain demand in pricing problems is often modeled 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, parametrized by a risk sensitivity coefficient, which includes the special case of risk neutrality.
Keywords: range forecasts, price-response function, customer valuations
Category 1: Robust Optimization
Category 2: Applications -- OR and Management Sciences (Yield Management )
Category 3: Nonlinear Optimization (Bound-constrained Optimization )
Citation: Technical Report, Lehigh University, Dept of Industrial and Systems Engineering, Bethlehem, PA 18015, USA.
Entry Submitted: 02/05/2008
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