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

Charles S. Tapiero, Konstantin Kogan

Research output: Contribution to journalArticlepeer-review

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

Keywords

  • Retailing
  • Risk management
  • Utility theory

ASJC Scopus subject areas

  • Computer Science(all)
  • Modeling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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