Abstract
Finding the optimal selling prices for an assortment of multiple, substitutable products is a problem that occurs daily in many industries. To solve this problem, a new customer choice model is proposed, based on the Markov Chain Choice Model combined with reservation prices. A discrete version of the model is proposed and it is solved to optimality. This discrete model is instrumental in a simulation procedure to estimate the optimal reservation prices in the original continuous model. Important benefits of the proposed model are that the model is intuitive and close to reality, because it includes both the customers' willingness to pay and substitution behavior explicitly, and it can handle any type of correlation between products.
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