Consumer Surplus Under Demand Uncertainty

Production and Operations Management, Forthcoming

47 Pages Posted: 14 Sep 2017 Last revised: 20 Jul 2021

See all articles by Maxime C. Cohen

Maxime C. Cohen

Desautels Faculty of Management, McGill University

Georgia Perakis

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Charles Thraves

University of Chile - Industrial Engineering; Instituto Sistemas Complejos de Ingenieria (ISCI)

Date Written: September 12, 2017

Abstract

Consumer Surplus is traditionally defined for the case where demand is a deterministic function of the price. However, demand is usually stochastic and hence stock-outs can occur. Policy makers who consider the impact of different regulations on Consumer Surplus often ignore the impact of demand uncertainty. We present a definition of the Consumer Surplus under stochastic demand. We then use this definition to study the impact of demand and supply uncertainty on consumers in several cases (additive and multiplicative demand noise). We show that, in many cases, demand uncertainty hurts consumers. We also derive analytical bounds on the ratio of the Consumer Surplus relative to the deterministic setting under linear demand. Our results suggest that ignoring uncertainty may severely impact the Consumer Surplus value.

Keywords: Consumer Surplus, Demand Uncertainty, OM-Economics Interface, Rationing Capacity

Suggested Citation

Cohen, Maxime C. and Perakis, Georgia and Thraves, Charles, Consumer Surplus Under Demand Uncertainty (September 12, 2017). Production and Operations Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3035992 or http://dx.doi.org/10.2139/ssrn.3035992

Maxime C. Cohen (Contact Author)

Desautels Faculty of Management, McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Georgia Perakis

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-565
Cambridge, MA 02142
United States

Charles Thraves

University of Chile - Industrial Engineering ( email )

Rep├║blica 701, Santiago
Chile

Instituto Sistemas Complejos de Ingenieria (ISCI) ( email )

Republica 695
Santiago
Santiago
Chile

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