Abstract
Uncertain demand in pricing problems is often modelled using the sum of a linear price-response function and a zero-mean random variable. In this paper, we argue that the presence of uncertainty motivates the introduction of nonlinearities in the demand as a function of price, both in the risk-neutral and risk-sensitive models. We motivate our analysis by investigating the impact of uncertainty on the individual customers’ valuations. We derive a family of price-response functions, parametrised by a risk sensitivity coefficient, which includes the special case of risk neutrality.
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