TITLE:
Analysing a Pricing Policy for a Home Centre: A Case Study
AUTHORS:
Dora Maglione, Angela Diblasi
KEYWORDS:
Almost Ideal Demand System; Elasticity; Profit Function; Linear Optimization
JOURNAL NAME:
Journal of Financial Risk Management,
Vol.3 No.1,
March
28,
2014
ABSTRACT: One critical aspect
of retailer category management is pricing the items in order to maximize total
profits. To define an appropriate pricing policy, a retailer should evaluate
how changes in prices of a set of items may impact their shelves or inter demands.
In this setting, elasticities play a major role. In addition, a proper policy
can be defined from different points of view. In this paper, estimation of a
profit function and its maximization under different scenarios is used as a
tool to analyze such policy. Estimation of this function is performed through
a previous selection of items within a home center category. Then, an adequate
AIDS model allowing calculation of elasticities is fitted. Moreover, a profit
function is defined in terms of prices and demands. This functionis linearized
for the following two purposes, to express it in terms of elasticities, and to
maximize it more easily under the consideration of different sets of item
prices defined in a convex set. Then, confidence intervals for the total and
marginal profits were built to gather the randomness of demands. The results
are applied to the selected items in a home center that behaves as a monopoly
in the area.