The effects of demand elasticity and selling price decisions on the value of information

摘要

To maximize its profit, a firm has to design a product or a system and sell it at the price that maximizes its expected profit. The selling price has a direct influence on the demand for the product. Consequently, corporations spend vast amounts of money and resources on gathering information to improve demand forecasting. This paper investigates the behavior of the value of information (VOI) for uncertain demand, and the effects of demand elasticity for the product on the information value. We discuss the variation of the VOI with demand elasticity and show that VOI is maximum at the specific elasticity at which the decision maker is indifferent between two selling price alternatives. The results enable firms to determine the value of demand information and the effects of demand elasticity for a selling price.