Choice Model Specification in Market-Based Engineering Design

Abstract

The application of market demand models in engineering design is now a well-established practice. One could consider the archetypical application to be a random utility model used in conjunction with a parametric design representation to optimize the design of a single product with respect to a risk-adjusted measure of profit. Much of the work in this area over the past decade has been focused on various extensions of this archetypical framework, such as problem decomposition and product family design. A wide variety of market demand models have been applied, including models derived from classic economic methods and random utility models spanning from multinomial logit through generalized extreme value to mixed logit. While there has been some discussion of the properties of the various choices of market demand models used in prior work, the most recent work in this area suggests that the consequences of market demand model specification in engineering design problems are both more significant than once realized and not yet fully understood. In this paper, we explore the consequences of market demand model specification specifically in the context of engineering design through both a review of prior work and an illustrative example problem featuring a market demand model parameterized in terms of reservation price. These results demonstrate that choices in market demand model specification — especially those relating to representation of customer heterogeneity — can lead to substantially different conclusions in a discrete product configuration design problem.