Pricing Conspicuous Consumption Products in Recession Periods with Uncertain Strength

We compare different approaches of optimization under uncertainty in the context of pricing strategies for conspicuous consumption products in recession periods of uncertain duration and strength. We consider robust worst-case ideas and how the concepts of Value at Risk (VaR) and Conditional Value at Risk (CVaR) can be incorporated efficiently. The approaches are generic in the sense that they can be applied to other economic decision making problems with uncertainty. We discuss the strengths and weaknesses of these approaches in general. We quantify runtimes and differences when applied to the special case of pricing decision making. We notice that VaR results in reliable strategies, although it is not a coherent measure of risk. The CVaR idea that has become the method of choice in financial mathematics is a very risk-averse version of safeguarding and thus a bit too conservative for pricing decisions. Also the resulting optimal control problem is the most expensive one from a computational point of view. From an economic and qualitative point of view we observe different safeguarding strategies with respect to when and how prices are adapted.


Submitted to European Journal of Decision Processes, August 2012