Risk averse retail pricing with robust demand forecasting |
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Authors: | Juan-Carlos Ferrer Diego Oyarzún |
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Institution: | a School of Engineering, Pontificia Universidad Católica de Chile, Chile b Pricing UC, Pontificia Universidad Católica de Chile, Chile |
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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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Keywords: | Pricing Risk aversion Demand uncertainty Retail Revenue management |
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