Product optimization with the improved marginal moment model

Abstract

ABSTRACTThe probabilistic choice model is an important theory foundation for investigating consumer choice behavior in product optimization. In most studies, probabilistic choice behavior is simulated by the multinomial logit (MNL) model and a product always obtains some market share even though the utility a consumer obtains from buying the product is negative. However, the MNL model has a very restrictive substitution pattern – the independence of irrelevant alternatives (IIA). This paper investigates a product optimization problem based on the marginal moment model (MMM). Residual utility is involved in the MMM and negative utility is considered as well. The optimization model of product line design, based on the improved MMM, is established to maximize total profit through three types of problems. The established model fits reality better because the MMM does not have the IIA problem and has good statistical performance. Numerical experiments are carried out to evaluate the feasibility of the proposed model. Meanwhile, the relationships are explored between the optimal solutions and several factors, including the competitive products’ prices, utility variance, rate of cost reduction, and utility of competitive products.