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Consumer Surplus Under Demand Uncertainty

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  • Maxime C. Cohen
  • Georgia Perakis
  • Charles Thraves

Abstract

Consumer Surplus is traditionally defined for the case where demand is a deterministic function of the price. However, demand is usually stochastic and hence stock‐outs can occur. Policy makers who consider the impact of different regulations on Consumer Surplus often ignore the impact of demand uncertainty. We present a definition of the Consumer Surplus under stochastic demand. We then use this definition to study the impact of demand and supply uncertainty on consumers in several cases (additive and multiplicative demand noise). We show that, in many cases, demand uncertainty hurts consumers. We also derive analytical bounds on the ratio of the Consumer Surplus relative to the deterministic setting under linear demand. Our results suggest that ignoring uncertainty may severely impact the Consumer Surplus value.

Suggested Citation

  • Maxime C. Cohen & Georgia Perakis & Charles Thraves, 2022. "Consumer Surplus Under Demand Uncertainty," Production and Operations Management, Production and Operations Management Society, vol. 31(2), pages 478-494, February.
    • Handle: RePEc:bla:popmgt:v:31:y:2022:i:2:p:478-494
    DOI: 10.1111/poms.13554
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    References listed on IDEAS

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    Cited by:

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    2. Fu, Xiao & Wu, Youqi & Huang, Di & Wu, Jianjun, 2022. "An activity-based model for transit network design and activity location planning in a three-party game framework," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 168(C).
    3. Hou, Lihua & Nie, Tengfei & Zhang, Jianghua, 2024. "Pricing and inventory strategies for perishable products in a competitive market considering strategic consumers," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 184(C).
    4. Xu, Xianhao & Chen, Cheng & Zou, Bipan & Wang, Hongwei & Li, Zhiwen, 2023. "Shipping before order making: Optimal shipping quantity and pricing decisions under uncertain demand," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 169(C).

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