Consumer Surplus Under Demand Uncertainty

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