A Class of Distributions for Linear Demand Markets

TL;DR

This paper introduces a new class of demand distributions, DGMRD, that generalizes IGFR distributions and characterizes optimal pricing strategies in markets with linear stochastic demand.

Contribution

It defines the DGMRD distribution class, explores its properties, and links it to existing IGFR distributions, providing a new framework for analyzing demand in economic markets.

Findings

DGMRD distributions generalize IGFR distributions.

Optimal prices are fixed points of the MRD function.

DGMRD distributions arise naturally as mixtures of IGFR distributions.

Abstract

In this paper, we study distributions that describe markets with linear stochastic demand. We express the price elasticity of expected demand in terms of the mean residual demand (MRD) function of the demand distribution and characterize optimal prices or equivalently, points of unitary elasticity, as fixed points of the MRD function. This leads to economic interpretable conditions on the demand distribution under which such fixed points exists and are unique. In particular, markets with increasing price elasticity of expected demand that eventually become elastic correspond to distributions with decreasing generalized mean residual demand (DGMRD) and finite second moment. DGMRD distributions strictly generalize the widely used increasing generalized failure rate (IGFR) distributions. In real life economic applications, they arise naturally as mixtures of (possibly) IGFR distributions over disjoint intervals. We further elaborate on the relationship of the two classes and link their limiting behavior at infinity. We examine moment and closure properties of the DGMRD distributions that are important in economic applications and illustrate our results with examples.