Product Line Pricing under Marginal Moment Model with Network Effect

Wei Qi,Xuwang Liu,Yang Yu,Xinggang Luo,Zhongliang Zhang

doi:10.1155/2019/6104805

Abstract

The complex network effect of the product exhibits has a significant impact on the product line optimization design. The multinomial logit (MNL) model which is used to simulate consumer choice behavior is applied in most of product line optimization problems. However, its assumptions, independence of irrelevant alternatives (IIA) and the same Gumbel distribution of random error terms, are usually difficult to be met in practice. The marginal moment model (MMM) can be used when the mean and variance of consumer’s utility error are known. The MMM not only has weak assumption conditions but also overcomes the IIA problem of MNL model. In this paper, we study the product pricing problem based on MMM with endogenous negative network effect. Firstly, we construct a variant of MMM considering network effect in product line optimization design. Secondly, we prove that the revenue function is concave in market share. We propose the solving methods of the model to obtain the optimal price, the corresponding market share, and the revenue under three different scenarios, i.e., developing single product, homogeneous products, and heterogeneous products. Finally, numerical experiments show that the proposed model can better simulate consumer choice behavior and potentially increase revenue.

Highlights

With the rapid development of Internet economy, the traditional consumption structure has been changed greatly, and the research on the influence of complex network effect for development and pricing of new products has become an important academic issue
We study the product pricing problem based on moment model (MMM) with endogenous negative network effect
In the research of product pricing problem, many scholars study the influence of positive network effect on consumer choice behavior based on multinomial logit (MNL) model [6,7,8,9], and it has been found that the optimal prices may be different even for homogeneous products case

Summary

Introduction

With the rapid development of Internet economy, the traditional consumption structure has been changed greatly, and the research on the influence of complex network effect for development and pricing of new products has become an important academic issue. In the research of product pricing problem, many scholars study the influence of positive network effect on consumer choice behavior based on MNL model [6,7,8,9], and it has been found that the optimal prices may be different even for homogeneous products case. In many product line design optimization problems, there exist a lot of products with negative network effect [1] and the problem of IIA may not be met In this case, consumer choice behavior simulation and product pricing would be very interesting practical issues. This paper focuses on the influence of the consumer choice behavior based on MMM with endogenous negative network effect on product line design problem.

Literature Review

Product Line Design Based on MMM with Network Effect

Numerical Experiments

Findings

Conclusions