Managerial utility-maximizing operating decisions under compound demand risk

This paper examines the demand and cost conditions under which utility maximizing pricing-risk and advertising-risk relationships are determinate. The structure of the firm's demand uncertainty captures both uncertain customer arrivals and uncertain individual customer demand. In addition to standard demand restrictions and constant marginal cost, determinate results depend upon the degree of managerial risk-aversion, the correlation between individual demand and customer arrival disturbances, the firm's cost fixity, and bounded product differentiation effects of advertising. The symmetry between price-cuts and advertising as demand-increasing costs is extensively examined; firm equilibrium requires that price-cuts not be an inferior input for increasing demand.