Manufacturer's pricing strategies in a single-period framework under price-dependent stochastic demand with asymmetric risk-preference information

Abstract

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.

Keywords:

• asymmetric information
• risk preferences
• inventory
• supply chain
• newsvendor problem

Acknowledgements

Financial assistance for the completion of this research from the Natural Sciences and Engineering Research Council of Canada and the Faculty of Business Administration, University of New Brunswick (Fredericton) is gratefully acknowledged.