Manufacturer's Pricing Strategies in a Single-Period Framework under Price-Dependent Stochastic Demand with Asymmetric Risk-Preference Information

• Published in: The Journal of the Operational Research Society Vol. 58; no. 11; pp. 1449 - 1458
• Main Authors: Arcelus, F. J., Kumar, S., Srinivasan, G.
• Format: Journal Article
• Language: English
• Published: Abingdon Palgrave Macmillan Press 01-11-2007; Taylor & Francis Ltd
• Subjects: Asymmetry; Dadaism; Error rates; Expected values; Manufacturers; Operations research; Order quantity; Preferences; Pricing policies; Pricing strategies; Profit per unit; Profits; Retail stores; Risk aversion; Risk management; Risk preferences; Special Issue Papers; Studies; Supply chain management; Wholesale prices
• ISSN: 0160-5682; 1476-9360
• DOI: 10.1057/palgrave.jors.2602400

This paper considers a single-period problem designed to analyse the pricing strategy of a manufacturer who does not possess full information about the retailer's risk-preferences. The retailer, who faces a price-dependent stochastic demand, is a maximizer of the risk-adjusted expected profit, rather than of the expected profit. The paper first evaluates the implication of the various risk-preferences of the retailer on the manufacturer's policy under a full-information scenario. Then, it considers a partial information scenario and computes the expected value of perfect information. Finally, it assesses the impact on the manufacturer's profit of sharing the retailer's risk through the introduction of a buyback policy. Linear or iso-elastic demand functions and additive or multiplicative demand error structures capture the demand distributions. Analytical results as well as numerical examples illustrate the main features of the model.