Abstract
We are interested in the effect of consumer demand estimation error for new products in the context of production planning. An inventory model is proposed, whereby demand is influenced by price and advertising. The effect of parameter misspecification of the demand model is empirically examined in relation to profit and service level feasibility. Faced with an uncertain consumer reaction to price and advertising, we find that it is safer to overestimate rather than underestimate the effect of price on demand. Moreover, under a service level constraint it is safer to overestimate the effect of advertising, whereas for strict profit maximization, underestimating the effect of advertising is the conservative approach.
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