Pricing and promised delivery lead time decisions with a risk-averse agent

Abstract

This paper studies how a risk-averse firm determines promised delivery lead time and price in a circumstance where the market demand depends not only on the selling price but also on the promised delivery lead time. Two scenarios, one in which the price and promised delivery lead time are independent and the other in which the price is promised delivery lead time sensitive, are analysed. Under conditional value-at-risk criterion, we examine how the risk aversion of decision-makers influences the optimal selection of price, promised delivery lead time and the overall utility of a risk-averse decision-maker. Moreover, by conducting comprehensive sensitivity analyses, we investigate the interaction effects of the decision-maker’s risk aversion and different parameters, including the price and lead time elasticity indexes, the inventory costs, as well as the capacity parameters on the optimal decisions and utilities, so as to offer managerial implications for practitioners under time-based competition environment.