A risk tolerance analysis for a joint price differentiation and inventory decisions problem with demand leakage effect

Syed Asif Raza*, Sivakumar Rathinam

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

19 Citations (Scopus)

Abstract

Price differentiation is a commonly used practice in Revenue Management (RM) to improve a firm's profitability. However, most studies in the literature have considered a risk-neutral firm to demonstrate the benefits of price differentiation. The main contribution of this paper is in considering several important objectives while determining the optimal product prices and order (production) quantities for a risk-adjusted firm with demand leakage effects in the presence of a price-dependent stochastic demand. The objectives considered include the maximization of a firm's expected profit and maximizing the probability of exceeding the risk adjusted expected revenue. Closed-form expressions for optimal product prices and production quantities are derived for several of these objectives. A numerical study is also presented to calibrate the impact of a firm's risk tolerance and other factors such as demand leakage, market demand variability on the firm's profitability and its optimal decision.

Original languageEnglish
Pages (from-to)129-145
Number of pages17
JournalInternational Journal of Production Economics
Volume183
DOIs
Publication statusPublished - Jan 1 2017
Externally publishedYes

Keywords

  • Alternative optimization objectives
  • Degree of risk tolerance
  • Demand leakage
  • Distribution-free approach
  • Market segmentation
  • Price differentiation
  • Revenue management
  • Survival analysis

ASJC Scopus subject areas

  • General Business,Management and Accounting
  • Economics and Econometrics
  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering

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