Research

There is now substantial evidence that pricing and inventory management are intimately tied. As consumers buy a particular product frequently, they develop their own price expectations. This expectation acts as a benchmark price. Consumers develop a reference price against which an announced price is compared. The reference price and the announced price jointly affect the demand. Moreover, the reference price dynamically evolves through time. A company that announces a discounted price may increase its revenue in the short term, but this discount affects its future benefits through the reference price. While electricity consumption was the main source of uncertainty under the old regime, volatile prices at exchanges add an additional risk dimension to planning processes in the new deregulated market setting. Due to the low price elasticity of consumer demand and the nonstorability of electricity electricity spot prices are notoriously hard to forecast and exhibit a variety of special features like nested seasonalities, negative prices, jumps and spikes.