Risk-averse order policies with random prices in complete market and retailers' private information

Charles Tapiero, Konstantin Kogan

Research output: Contribution to journalArticle

Abstract

We consider a retailer who orders products before the price for them becomes known. The price is an outcome of perfect competition in a complete market. Since the demand is price sensitive, the uncertainty in prices induces uncertain profits and associated risks. In this paper we show that if the retailer is risk averse and, as a result, selects a utility function of profit to maximize, then his subjective assessment of future prices is affected by the risk attitude. This, in turn, introduces a bias in retailer's ordering policies. By considering coordinated pricing and ordering policies we derive a relationship between risk aversion, retailer's subjective (private) assessment and the market implied, risk neutral forecast. This relationship and the induced bias are then illustrated for two typical operations management strategies which involve either inventory considerations or promotions avoiding accumulation of stocks.

Original languageEnglish (US)
Pages (from-to)594-599
Number of pages6
JournalEuropean Journal of Operational Research
Volume196
Issue number2
DOIs
StatePublished - Jul 16 2009

Fingerprint

Private Information
Ordering Policy
Profit
Profitability
Operations Management
Risk Aversion
Utility Function
Pricing
Forecast
Maximise
Policy
Market
Private information
Risk-averse
Complete markets
Retailers
Uncertainty
Costs
Ordering policy

Keywords

  • Retailing
  • Risk management
  • Utility theory

ASJC Scopus subject areas

  • Information Systems and Management
  • Management Science and Operations Research
  • Modeling and Simulation

Cite this

Risk-averse order policies with random prices in complete market and retailers' private information. / Tapiero, Charles; Kogan, Konstantin.

In: European Journal of Operational Research, Vol. 196, No. 2, 16.07.2009, p. 594-599.

Research output: Contribution to journalArticle

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