An approach to competitive product line design using conjoint data

Abstract

In today’s highly competitive environment, where market oriented firms aim to maximize profits through customer satisfaction, there is an increasing need to design a product line, rather than a single product. The main goal of designing a profit maximizing product line is to target the ‘right product’ to the ‘right customer’. Although conjoint analysis has turned out to be one of the most widely used techniques for product line design, it falls to explicitly consider retaliatory reactions from competitors. In this paper, we propose a new conjoint-based approach to competitive new product line design, employing the Nash equilibrium concept. The optimal product line design problem for each firm is formulated as a nonlinear integer programming problem. In the absence of a closed-form solution, to compute the Nash equilibrium and to determine the optimal product line, we propose a two-phase procedure: a sequential iterative procedure in the first phase, and backward induction in the second. To solve the optimization problem in each of the iterations of the sequential procedure, we used the branch-and-bound method. The proposed approach is illustrated under several scenarios of competition using previously published conjoint data.