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research article

Price Discrimination with Robust Beliefs

Han, Jun  
•
Weber, T. A.  
April 16, 2023
European Journal of Operational Research

This paper considers the problem of second-degree price discrimination when the type distribution is unknown or imperfectly specified by means of an ambiguity set. As robustness measure we use a performance index, equivalent to relative regret, which quantifies the worst-case attainment ratio between actual payoff and ex-post optimal payoff. We provide a simple representation of this performance index, as the lower envelope of two boundary performance ratios, relative to beliefs that lie at the boundary of the ambiguity set. A characterization of the solution to the underlying robust identification problem is given, which leads to a robust product portfolio, for which we also determine the worst-case performance over all possible consumer types. For a standard linear quadratic specification of the robust screening model, a worst-case performance index of 75% guarantees that the robust product portfolio exhibits a profitability that lies within a 25%-band of an ex-post optimal product portfolio, over all possible model parameters and beliefs. Finally, a numerical comparison benchmarks the robust solution against a number of alternative belief heuristics.

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Type
research article
DOI
10.1016/j.ejor.2022.08.022
Author(s)
Han, Jun  
Weber, T. A.  
Date Issued

2023-04-16

Published in
European Journal of Operational Research
Volume

306

Issue

2

Start page

795

End page

809

Subjects

Ambiguity

•

Pricing

•

Relative Regret

•

Robust Optimization

•

Screening

Editorial or Peer reviewed

REVIEWED

Written at

EPFL

EPFL units
OES  
Available on Infoscience
February 8, 2023
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/194688
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