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Estimation under Profit-Driven Loss Functions

Author

Listed:
  • Blattberg, Robert C
  • George, Edward I

Abstract

Consider the problem of estimating a price-sensitivity parameter in a demand model. Depending on the context in which the estimate will be used, traditional squared-error loss may be inappropriate. The authors consider the situation in which the estimate will be used by a manufacturer to set the price. Effectively, the manufacturer's goal of profit maximization induces a loss function that turns out to be asymmetric. Estimates that perform well with respect to such loss functions are obtained. A real example is considered in which, compared to traditional estimation under squared-error loss, this approach leads to smaller price-sensitivity estimates, suggesting higher optimal prices.

Suggested Citation

  • Blattberg, Robert C & George, Edward I, 1992. "Estimation under Profit-Driven Loss Functions," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(4), pages 437-444, October.
    • Handle: RePEc:bes:jnlbes:v:10:y:1992:i:4:p:437-44
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    Cited by:

    1. Oded Netzer & Olivier Toubia & Eric Bradlow & Ely Dahan & Theodoros Evgeniou & Fred Feinberg & Eleanor Feit & Sam Hui & Joseph Johnson & John Liechty & James Orlin & Vithala Rao, 2008. "Beyond conjoint analysis: Advances in preference measurement," Marketing Letters, Springer, vol. 19(3), pages 337-354, December.
    2. Muus, Lars & Scheer, Hiek van der & Wansbeek, Tom, 1999. "The risk function approach to profit maximizing estimation in direct mailing," CCSO Working Papers 199914, University of Groningen, CCSO Centre for Economic Research.
    3. Arthur Hsu & Ronald T. Wilcox, 2000. "Stochastic Prediction in Multinomial Logit Models," Management Science, INFORMS, vol. 46(8), pages 1137-1144, August.
    4. Aurélie Lemmens & Sunil Gupta, 2020. "Managing Churn to Maximize Profits," Marketing Science, INFORMS, vol. 39(5), pages 956-973, September.
    5. Alan L. Montgomery & Eric T. Bradlow, 1999. "Why Analyst Overconfidence About the Functional Form of Demand Models Can Lead to Overpricing," Marketing Science, INFORMS, vol. 18(4), pages 569-583.
    6. repec:dgr:rugccs:199914 is not listed on IDEAS

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