A profit maximising product line optimisation model under monopolistic competition

Abstract

Existing research on product line optimisation have focused mainly on designing a product line based on the trade-offs between sellers’ and buyers’ utility, without any explicit consideration of the underlying market structure. A few studies can be found that consider the monopolists’ optimal product line offering. In this study, we examine the optimal product line decision of an entrant firm under monopolistic competitive markets. Specifically, we develop a mathematical programming formulation of an entrant firm’s problem of deciding on the market segments to enter and the corresponding product designs to offer, to maximise its profit. A heuristic has been presented for solving the resulting mixed integer non-linear programming problem. The specifications of the problem increase exponentially with the size of the problem and as such, commercial solvers are not useful for solving a generalised instance. A small example has been presented and solved using both the heuristic and the ILOG CPLEX 10.2. Both result in identical solutions. We attempt an explanation on why the heuristic gives an optimal solution.