Assortment planning and pricing for configurable product under sequential choice process

Abstract

The current paper considers a retailer selling a vertically differentiated configurable product (e.g., a mobile phone), which is a combination of a required component (e.g., CPU) and an optional component (e.g., headphone). Each component consists of several quality-differentiated variants from which customers can choose. Customers differ in their valuation for quality, and each customer independently chooses the variant that maximizes his utility. First, the scenario where a customer’s purchase decision depends on the prices and assortments of both the required and optional components is examined. The results indicate that the assortment and price optimization problem for configurable products can be separated into each component category’s assortment and price decisions. Furthermore, the optimal assortment of each component category does not depend on the distribution of customer valuations. It is comprised of the variants that are on the lowest convex envelope curve of the quality-cost graph of that category. An efficient algorithm is proposed to identify the retailer’s optimal decisions. Then, we examine the case where a customer evaluates an optional variant only if he decides to purchase a required variant. The results suggest that: (i) there exist some relationships between the optimal decisions in the base choice model and that in the sequential choice model; (ii) overlooking the sequential choice behavior may result in broader assortment, suboptimal prices, and profit loss.