Two-stage simulation–optimization profit maximization model

Abstract

Companies are interested in maximizing profit, which happens at the individual product level. We introduce a two-stage model which uses both simulation and optimization to maximize the profit of an individual product. We utilize the concept of consumer margin, benefits minus price, as a way for consumers to determine which product within a competitive set to purchase (if any). The purpose of the stage 1 model is to find the consumer margins and standard deviation that will give the most accurate model. Next, the consumer margins and standard deviation are used in the stage 2 model to find the price that will maximize the profit of a given product. The model is illustrated through a case study involving the top 10 selling sedans in the United States in 2019. In short, this paper will help companies to maximize the profit of a given product through using this two-stage simulation–optimization model to find the optimal price for the product.