Progress and Challenges in Product Line Pricing

Abstract

In recent years, there has been a substantial increase in research on product line pricing. Modelers in multiple disciplines have offered methods for the optimal design/selection and pricing of the products in new or modified product lines. Behavioral scientists have contributed insights on how consumers' perceptions of product line prices, attributes, and quality levels influence their evaluation of the alternative choices. Significantly, the work of both modelers and behavioral scientists is distributed across three types of product line contexts: price‐quality product lines, multi‐attribute product lines, and product lines that include a core product plus options. This paper reviews this literature, and assesses its usefulness for managers. One observation is that, while scholars have developed approaches to optimization that offer increased scope and tractability, the applicability of these models is constrained by the narrow specification of profit functions, and the limited consideration of competitive and other dynamic forces. A second conclusion is that the managerial usefulness of the behavioral science research on perceptions and product‐line choice has been limited by a dependence on attribute‐based estimation of utilities, uncertainty about possible interaction effects, and an excessive focus on the cannibalization aspects of product line pricing. Based on the review, a research agenda is identified for enhancing the applicability of research on consumer perceptions and choice to product line pricing decisions, and for building more complete product line price optimization models.