Product line pricing with the improved MMM

Abstract

Probabilistic choice model is an important theory foundation for investigating consumer choice behavior. Multinomial logit model (MNL) is the most widely used probabilistic choice model, but its assumptions, irrelevant options are independent and obey the same Gumbel distribution, are difficult to be satisfied in practice. Marginal moment model (MMM) has weak assumptions, i.e., the mean and variance of consumer's utility are known, which are easy to be satisfied. Residual utility of the consumer is applied to MMM, and the optimization model of product line based on the improved MMM is established to investigate product pricing problem through three types of problems. Then the negative utility is applied to the optimization model, and numerical experiments show that the results are closer to reality. Finally the relationship between the optimal solution and competitive products' price is explored. The results obtained by MMM are satisfactory. MMM has a good application prospect.