IDEAS home Printed from https://ideas.repec.org/a/eee/proeco/v183y2017ipap129-145.html
   My bibliography  Save this article

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

Author

Listed:
  • Raza, Syed Asif
  • Rathinam, Sivakumar

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.

Suggested Citation

  • Raza, Syed Asif & Rathinam, Sivakumar, 2017. "A risk tolerance analysis for a joint price differentiation and inventory decisions problem with demand leakage effect," International Journal of Production Economics, Elsevier, vol. 183(PA), pages 129-145.
    • Handle: RePEc:eee:proeco:v:183:y:2017:i:pa:p:129-145
    DOI: 10.1016/j.ijpe.2016.09.026
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0925527316302985
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ijpe.2016.09.026?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Wang, Charles X. & Webster, Scott & Suresh, Nallan C., 2009. "Would a risk-averse newsvendor order less at a higher selling price?," European Journal of Operational Research, Elsevier, vol. 196(2), pages 544-553, July.
    2. E. Andrew Boyd, 2007. "The Future of Pricing," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-60690-6, December.
    3. Edwin S. Mills, 1959. "Uncertainty and Price Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 73(1), pages 116-130.
    4. Liao, Yi & Banerjee, Avijit & Yan, Changyuan, 2011. "A distribution-free newsvendor model with balking and lost sales penalty," International Journal of Production Economics, Elsevier, vol. 133(1), pages 224-227, September.
    5. Khouja, Moutaz, 1999. "The single-period (news-vendor) problem: literature review and suggestions for future research," Omega, Elsevier, vol. 27(5), pages 537-553, October.
    6. Wei, Ying & Choi, Tsan-Ming, 2010. "Mean-variance analysis of supply chains under wholesale pricing and profit sharing schemes," European Journal of Operational Research, Elsevier, vol. 204(2), pages 255-262, July.
    7. Wang, Shih-Yen & Sheen, Gwo-Ji & Yeh, Yingchieh, 2015. "Pricing and shelf space decisions with non-symmetric market demand," International Journal of Production Economics, Elsevier, vol. 169(C), pages 233-239.
    8. Lin, Chen-Sin & Kroll, Dennis E., 1997. "The single-item newsboy problem with dual performance measures and quantity discounts," European Journal of Operational Research, Elsevier, vol. 100(3), pages 562-565, August.
    9. Michael Zhang & Peter C. Bell, 2010. "Fencing in the context of revenue management," International Journal of Revenue Management, Inderscience Enterprises Ltd, vol. 4(1), pages 42-68.
    10. Zhang, Michael & Bell, Peter C. & Cai, Gangshu (George) & Chen, Xiangfeng, 2010. "Optimal fences and joint price and inventory decisions in distinct markets with demand leakage," European Journal of Operational Research, Elsevier, vol. 204(3), pages 589-596, August.
    11. Denzil G. Fiebig & Michael P. Keane & Jordan Louviere & Nada Wasi, 2010. "The Generalized Multinomial Logit Model: Accounting for Scale and Coefficient Heterogeneity," Marketing Science, INFORMS, vol. 29(3), pages 393-421, 05-06.
    12. Louis Eeckhoudt & Christian Gollier & Harris Schlesinger, 1995. "The Risk-Averse (and Prudent) Newsboy," Management Science, INFORMS, vol. 41(5), pages 786-794, May.
    13. Yang, Shilei & Shi, Chunming Victor & Zhao, Xuan, 2011. "Optimal ordering and pricing decisions for a target oriented newsvendor," Omega, Elsevier, vol. 39(1), pages 110-115, January.
    14. Zhou, Erfeng & Zhang, Juzhi & Gou, Qinglong & Liang, Liang, 2015. "A two period pricing model for new fashion style launching strategy," International Journal of Production Economics, Elsevier, vol. 160(C), pages 144-156.
    15. Alfares, Hesham K. & Elmorra, Hassan H., 2005. "The distribution-free newsboy problem: Extensions to the shortage penalty case," International Journal of Production Economics, Elsevier, vol. 93(1), pages 465-477, January.
    16. Li, Gang & Fan, Huan & Lee, Peter K.C. & Cheng, T.C.E., 2015. "Joint supply chain risk management: An agency and collaboration perspective," International Journal of Production Economics, Elsevier, vol. 164(C), pages 83-94.
    17. Youhua (Frank) Chen & Minghui Xu & Zhe George Zhang, 2009. "Technical Note---A Risk-Averse Newsvendor Model Under the CVaR Criterion," Operations Research, INFORMS, vol. 57(4), pages 1040-1044, August.
    18. Lee, Se Won & Jung, Uk, 2014. "Customer balking behavior in the newsvendor model: Its impact on performance measures and decision under uncertain balking parameters," International Journal of Production Economics, Elsevier, vol. 154(C), pages 274-283.
    19. Keren, Baruch & Pliskin, Joseph S., 2006. "A benchmark solution for the risk-averse newsvendor problem," European Journal of Operational Research, Elsevier, vol. 174(3), pages 1643-1650, November.
    20. Wu, Meng & Zhu, Stuart X. & Teunter, Ruud H., 2013. "The risk-averse newsvendor problem with random capacity," European Journal of Operational Research, Elsevier, vol. 231(2), pages 328-336.
    21. Hurtubia, Ricardo & Nguyen, My Hang & Glerum, Aurélie & Bierlaire, Michel, 2014. "Integrating psychometric indicators in latent class choice models," Transportation Research Part A: Policy and Practice, Elsevier, vol. 64(C), pages 135-146.
    22. Xinsheng Xu & Zhiqing Meng & Ping Ji & Chuangyin Dang & Hongwei Wang, 2016. "On the newsvendor model with conditional Value-at-Risk of opportunity loss," International Journal of Production Research, Taylor & Francis Journals, vol. 54(8), pages 2449-2458, April.
    23. Kim, Sang-Won, 2015. "The impact of customer buying behavior on the optimal allocation decisions," International Journal of Production Economics, Elsevier, vol. 163(C), pages 71-88.
    24. Wu, Meng & Zhu, Stuart X. & Teunter, Ruud H., 2013. "Newsvendor problem with random shortage cost under a risk criterion," International Journal of Production Economics, Elsevier, vol. 145(2), pages 790-798.
    25. Sun, Qi & Dong, Yucheng & Xu, Weidong, 2013. "Effects of higher order moments on the newsvendor problem," International Journal of Production Economics, Elsevier, vol. 146(1), pages 167-177.
    26. Hackbarth, André & Madlener, Reinhard, 2016. "Willingness-to-pay for alternative fuel vehicle characteristics: A stated choice study for Germany," Transportation Research Part A: Policy and Practice, Elsevier, vol. 85(C), pages 89-111.
    27. WEI, Ying & CHOI, Tsan-Ming, 2010. "Mean-variance analysis of supply chains under wholesale pricing and profit sharing schemes," LIDAM Reprints CORE 2186, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    28. Wu, Meng & Zhu, Stuart X. & Teunter, Ruud H., 2014. "A risk-averse competitive newsvendor problem under the CVaR criterion," International Journal of Production Economics, Elsevier, vol. 156(C), pages 13-23.
    29. C Shi & B Chen, 2007. "Pareto-optimal contracts for a supply chain with satisficing objectives," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 58(6), pages 751-759, June.
    30. Kevin Taaffe & Kiran Chahar & Deepak Tirumalasetty, 2008. "Risk averse selective newsvendor problems," International Journal of Operational Research, Inderscience Enterprises Ltd, vol. 3(6), pages 681-703.
    31. Zhu, Stuart X., 2015. "Integration of capacity, pricing, and lead-time decisions in a decentralized supply chain," International Journal of Production Economics, Elsevier, vol. 164(C), pages 14-23.
    32. Wei, Shuoguo & Tang, Ou & Liu, Weihua, 2015. "Refund policies for cores with quality variation in OEM remanufacturing," International Journal of Production Economics, Elsevier, vol. 170(PB), pages 629-640.
    33. Gotoh, Jun-ya & Takano, Yuichi, 2007. "Newsvendor solutions via conditional value-at-risk minimization," European Journal of Operational Research, Elsevier, vol. 179(1), pages 80-96, May.
    34. Xinsheng, Xu & Zhiqing, Meng & Rui, Shen & Min, Jiang & Ping, Ji, 2015. "Optimal decisions for the loss-averse newsvendor problem under CVaR," International Journal of Production Economics, Elsevier, vol. 164(C), pages 146-159.
    35. Raza, Syed Asif, 2015. "An integrated approach to price differentiation and inventory decisions with demand leakage," International Journal of Production Economics, Elsevier, vol. 164(C), pages 105-117.
    36. Hong, Xianpei & Xu, Lei & Du, Peng & Wang, Wenjuan, 2015. "Joint advertising, pricing and collection decisions in a closed-loop supply chain," International Journal of Production Economics, Elsevier, vol. 167(C), pages 12-22.
    37. C Shi & B Chen, 2008. "Pareto quantity flexibility contracts for a supply chain under multiple objectives," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 59(5), pages 685-692, May.
    38. Raza, Syed Asif & Turiac, Mihaela, 2016. "Joint optimal determination of process mean, production quantity, pricing, and market segmentation with demand leakage," European Journal of Operational Research, Elsevier, vol. 249(1), pages 312-326.
    39. Martin A. Lariviere, 2006. "A Note on Probability Distributions with Increasing Generalized Failure Rates," Operations Research, INFORMS, vol. 54(3), pages 602-604, June.
    40. Kwon, Kysang & Cheong, Taesu, 2014. "A minimax distribution-free procedure for a newsvendor problem with free shipping," European Journal of Operational Research, Elsevier, vol. 232(1), pages 234-240.
    41. Li, Linda & Miller, David & Schmidt, Charles P., 2016. "Optimizing inventory׳s contribution to profitability in a regulated utility: The Averch–Johnson effect," International Journal of Production Economics, Elsevier, vol. 175(C), pages 132-141.
    42. Wu, Jun & Li, Jian & Wang, Shouyang & Cheng, T.C.E., 2009. "Mean-variance analysis of the newsvendor model with stockout cost," Omega, Elsevier, vol. 37(3), pages 724-730, June.
    43. Mostard, Julien & de Koster, Rene & Teunter, Ruud, 2005. "The distribution-free newsboy problem with resalable returns," International Journal of Production Economics, Elsevier, vol. 97(3), pages 329-342, September.
    44. Nooraie, S. Vahid & Mellat Parast, Mahour, 2015. "A multi-objective approach to supply chain risk management: Integrating visibility with supply and demand risk," International Journal of Production Economics, Elsevier, vol. 161(C), pages 192-200.
    45. Arcelus, F.J. & Kumar, Satyendra & Srinivasan, G., 2012. "Risk tolerance and a retailer's pricing and ordering policies within a newsvendor framework," Omega, Elsevier, vol. 40(2), pages 188-198, April.
    46. Lijun Ma, 2008. "Loss-averse newsvendor problem with general profit target," International Journal of Information and Decision Sciences, Inderscience Enterprises Ltd, vol. 1(2), pages 145-163.
    47. Du, Jie & Zhang, Juliang & Hua, Guowei, 2015. "Pricing and inventory management in the presence of strategic customers with risk preference and decreasing value," International Journal of Production Economics, Elsevier, vol. 164(C), pages 160-166.
    48. Guo, Peijun & Ma, Xiuyan, 2014. "Newsvendor models for innovative products with one-shot decision theory," European Journal of Operational Research, Elsevier, vol. 239(2), pages 523-536.
    49. Michael Keane & Nada Wasi, 2013. "Comparing Alternative Models Of Heterogeneity In Consumer Choice Behavior," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(6), pages 1018-1045, September.
    50. Zhang, Michael & Bell, Peter C., 2007. "The effect of market segmentation with demand leakage between market segments on a firm's price and inventory decisions," European Journal of Operational Research, Elsevier, vol. 182(2), pages 738-754, October.
    51. Dai, Jiansheng & Meng, Weidong, 2015. "A risk-averse newsvendor model under marketing-dependency and price-dependency," International Journal of Production Economics, Elsevier, vol. 160(C), pages 220-229.
    52. Wang, Charles X. & Webster, Scott, 2009. "The loss-averse newsvendor problem," Omega, Elsevier, vol. 37(1), pages 93-105, February.
    53. Xin Chen & Melvyn Sim & David Simchi-Levi & Peng Sun, 2007. "Risk Aversion in Inventory Management," Operations Research, INFORMS, vol. 55(5), pages 828-842, October.
    54. Abad, Prakash, 2014. "Determining optimal price and order size for a price setting newsvendor under cycle service level," International Journal of Production Economics, Elsevier, vol. 158(C), pages 106-113.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Davide Castellano & Mosè Gallo & Liberatina C. Santillo, 2021. "A periodic review policy for a coordinated single vendor-multiple buyers supply chain with controllable lead time and distribution-free approach," 4OR, Springer, vol. 19(3), pages 347-388, September.
    2. Wang, Chong & Chen, Jing & Chen, Xu, 2017. "Pricing and order decisions with option contracts in the presence of customer returns," International Journal of Production Economics, Elsevier, vol. 193(C), pages 422-436.
    3. Qingguo Bai & Jianteng Xu & Yuzhong Zhang, 2022. "The distributionally robust optimization model for a remanufacturing system under cap-and-trade policy: a newsvendor approach," Annals of Operations Research, Springer, vol. 309(2), pages 731-760, February.
    4. Syed Asif Raza, 2020. "Price Differentiation and Inventory Decisions in a Socially Responsible Dual-Channel Supply Chain with Partial Information Stochastic Demand and Cannibalization," Sustainability, MDPI, vol. 12(22), pages 1-42, November.
    5. Mokhtari, Hadi, 2018. "Economic order quantity for joint complementary and substitutable items," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 154(C), pages 34-47.
    6. Raza, Syed Asif, 2018. "Supply chain coordination under a revenue-sharing contract with corporate social responsibility and partial demand information," International Journal of Production Economics, Elsevier, vol. 205(C), pages 1-14.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Arcelus, F.J. & Kumar, Satyendra & Srinivasan, G., 2012. "Risk tolerance and a retailer's pricing and ordering policies within a newsvendor framework," Omega, Elsevier, vol. 40(2), pages 188-198, April.
    2. Wang, Daao & Dimitrov, Stanko & Jian, Lirong, 2020. "Optimal inventory decisions for a risk-averse retailer when offering layaway," European Journal of Operational Research, Elsevier, vol. 284(1), pages 108-120.
    3. Wang, Ruopeng & Wang, Jinting, 2018. "Procurement strategies with quantity-oriented reference point and loss aversion," Omega, Elsevier, vol. 80(C), pages 1-11.
    4. Raza, Syed Asif, 2015. "An integrated approach to price differentiation and inventory decisions with demand leakage," International Journal of Production Economics, Elsevier, vol. 164(C), pages 105-117.
    5. Chun-Hung Chiu & Tsan-Ming Choi, 2016. "Supply chain risk analysis with mean-variance models: a technical review," Annals of Operations Research, Springer, vol. 240(2), pages 489-507, May.
    6. Poormoaied, Saeed & Atan, Zümbül, 2020. "A multi-attribute utility theory approach to ordering policy for perishable items," International Journal of Production Economics, Elsevier, vol. 225(C).
    7. Xinsheng, Xu & Zhiqing, Meng & Rui, Shen & Min, Jiang & Ping, Ji, 2015. "Optimal decisions for the loss-averse newsvendor problem under CVaR," International Journal of Production Economics, Elsevier, vol. 164(C), pages 146-159.
    8. Li, Xiang & Qi, Xiangtong & Li, Yongjian, 2021. "On sales effort and pricing decisions under alternative risk criteria," European Journal of Operational Research, Elsevier, vol. 293(2), pages 603-614.
    9. Jörnsten, Kurt & Lise Nonås, Sigrid & Sandal, Leif & Ubøe, Jan, 2012. "Transfer of risk in the newsvendor model with discrete demand," Omega, Elsevier, vol. 40(3), pages 404-414.
    10. Indranil Biswas & Arnab Adhikari & Baidyanath Biswas, 2020. "Channel coordination of a risk-averse supply chain: a mean–variance approach," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 47(4), pages 415-429, December.
    11. Xu, Xinsheng & Wang, Hongwei & Dang, Chuangyin & Ji, Ping, 2017. "The loss-averse newsvendor model with backordering," International Journal of Production Economics, Elsevier, vol. 188(C), pages 1-10.
    12. Xinsheng Xu & Zhiqing Meng & Ping Ji & Chuangyin Dang & Hongwei Wang, 2016. "On the newsvendor model with conditional Value-at-Risk of opportunity loss," International Journal of Production Research, Taylor & Francis Journals, vol. 54(8), pages 2449-2458, April.
    13. Qin, Yan & Wang, Ruoxuan & Vakharia, Asoo J. & Chen, Yuwen & Seref, Michelle M.H., 2011. "The newsvendor problem: Review and directions for future research," European Journal of Operational Research, Elsevier, vol. 213(2), pages 361-374, September.
    14. Kim, Kyoung-Kuk & Park, Kun Soo, 2014. "Transferring and sharing exchange-rate risk in a risk-averse supply chain of a multinational firm," European Journal of Operational Research, Elsevier, vol. 237(2), pages 634-648.
    15. Dai, Jiansheng & Meng, Weidong, 2015. "A risk-averse newsvendor model under marketing-dependency and price-dependency," International Journal of Production Economics, Elsevier, vol. 160(C), pages 220-229.
    16. Arıkan, Emel & Fichtinger, Johannes, 2017. "The risk-averse newsvendor problem under spectral risk measures: A classification with extensions," European Journal of Operational Research, Elsevier, vol. 256(1), pages 116-125.
    17. Bai, Tian & Wu, Meng & Zhu, Stuart X., 2019. "Pricing and ordering by a loss averse newsvendor with reference dependence," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 131(C), pages 343-365.
    18. Felix T. S. Chan & Xinsheng Xu, 2019. "The Loss-Averse Retailer’s Order Decisions Under Risk Management," Mathematics, MDPI, vol. 7(7), pages 1-16, July.
    19. Rahimian, Hamed & Bayraksan, Güzin & Homem-de-Mello, Tito, 2019. "Controlling risk and demand ambiguity in newsvendor models," European Journal of Operational Research, Elsevier, vol. 279(3), pages 854-868.
    20. Mou, Shandong & Robb, David J. & DeHoratius, Nicole, 2018. "Retail store operations: Literature review and research directions," European Journal of Operational Research, Elsevier, vol. 265(2), pages 399-422.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:proeco:v:183:y:2017:i:pa:p:129-145. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ijpe .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.