Please use this identifier to cite or link to this item:
http://hdl.handle.net/10397/89683
Title: | Role of risk aversion in price postponement under supply random yield | Authors: | Kouvelis, P Xiao, G Yang, N |
Issue Date: | Aug-2021 | Source: | Management science, Aug. 2021, v. 67, no. 8, p. 4826-4844 | Abstract: | Price postponement is an effective mechanism to hedge against the adverse effect of supply random yield. However, its effectiveness and the resulting production decisions have not been studied for risk-averse firms. In this paper, we investigate the impact of price postponement and risk aversion under supply yield risk. Specifically, we study a risk-averse monopoly firm’s production and pricing decisions under supply random yield with two distinct pricing schemes: (1) ex ante pricing in which the firm simultaneously makes the sales price and sourcing decisions before production takes place and (2) responsive pricing in which the pricing decision is postponed until after the production yield realization. We adopt conditional value at risk (CVaR) as the riskaversion measurement and investigate the impact of the firm’s risk-aversion level on its optimal decisions and the corresponding profit. Among other results, we show that, for each pricing scheme, there exists a unique risk-aversion threshold under which the firm chooses not to produce. Interestingly, price postponement has no impact on the riskaversion threshold as the cutoff values under both pricing schemes are the same. We further show that the value of CVaR improvement from responsive pricing may not be monotonic in the firm’s risk-aversion level. Consequently, our results indicate that, although price postponement induces operational flexibility by better matching demand with available supply, whether the firm should adopt responsive pricing needs to be carefully evaluated as the benefit may not justify the potential fixed cost associated with price postponement, especially for a highly risk-averse firm. In addition, we show that responsive pricing, even with its ex post revenue-maximization behavior, benefits the endmarket consumers in equilibrium. Finally, we conduct extensive numerical studies to check and confirm the robustness of our results. | Keywords: | Random yield Price postponement Risk aversion Consumer surplus |
Publisher: | Institute for Operations Research and the Management Sciences | Journal: | Management science | ISSN: | 0025-1909 | EISSN: | 1526-5501 | DOI: | 10.1287/mnsc.2020.3755 | Rights: | © 2020 INFORMS This is the accepted manuscript of the following article: Kouvelis, P., Xiao, G., & Yang, N. (2021). Role of risk aversion in price postponement under supply random yield. Management Science, 67(8), 4826-4844, which has been published in final form at https://doi.org/10.1287/mnsc.2020.3755 |
Appears in Collections: | Journal/Magazine Article |
Files in This Item:
File | Description | Size | Format | |
---|---|---|---|---|
Xiao_Role_Risk_Aversion.pdf | Pre-Published version | 1.54 MB | Adobe PDF | View/Open |
Page views
79
Last Week
1
1
Last month
Citations as of Apr 21, 2024
Downloads
157
Citations as of Apr 21, 2024
SCOPUSTM
Citations
23
Citations as of Apr 19, 2024
WEB OF SCIENCETM
Citations
21
Citations as of Apr 18, 2024
Google ScholarTM
Check
Altmetric
Items in DSpace are protected by copyright, with all rights reserved, unless otherwise indicated.