Correspondence: Aurelie Thiele, Department of Industrial and Systems Engineering, Lehigh University, Mohler Building Room 329, 200 W Packer Ave, Bethlehem, PA 18015, USA. Tel: +1 610 758 2903; Fax: +1 610 758 4886; E-mail: aurelie.thiele@lehigh.edu

¹Aurélie Thiele is the P.C. Rossin Assistant Professor of Industrial Engineering at Lehigh University in Bethlehem, Pennsylvania. Her work on revenue management is supported in part by the National Science Foundation under grant DMI-0540143 and International Business Machines. She has received the first prize in the 2003 Nicholson Student Paper Competition and is the recipient of a 2007 IBM Faculty Award in Services Sciences, Management and Engineering. She holds an SM and a PhD from the Massachusetts Institute of Technology.

Received 16 October 2007; Revised 16 October 2007; Published online 14 March 2008.

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.