Coordinating Marketing and Production with Asymmetric Costs: Theory and Estimation

This paper proposes a theoretical framework for decision making when the firm needs to make marketing and production/order decisions simultaneously before demand uncertainty is resolved. We discuss the theoretical properties of the framework for single and multi-product firms; in addition, we show that the framework can be extended to allow for competitive reaction in a duopoly setting. We propose an empirical method to operationalize the model and compare the results to those from extant methods. The empirical results for both single and multi-product firms show that the proposed method outperforms decision making using standard econometric methods. In particular, depending on customer lifetime value (CLV) and other error costs and price elasticities, the loss in potential profits by using the standard regression-based methodology or quantile regression can be considerable.