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Estimation under Profit-Driven Loss Functions

  • Blattberg, Robert C
  • George, Edward I
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    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.

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    Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

    Volume (Year): 10 (1992)
    Issue (Month): 4 (October)
    Pages: 437-44

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    Handle: RePEc:bes:jnlbes:v:10:y:1992:i:4:p:437-44
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