Product Line Pricing Research Articles

Pricing optimization of product line with value-added services considering consumer choice behavior

ABSTRACT The global economy is transitioning from product economy to service economy, and the optimization of product line with value-added services is one of the important issues faced by enterprises. Therefore, this paper studies the pricing optimization of product line with value-added services considering consumer choice behavior. First, we apply the multinomial logit (MNL) model to simulate consumer choice behavior, and establish a MNL-based product line pricing optimization model considering value-added services. Then, the optimal pricing strategies for products and services are solved for three different scenarios: single product with service, homogeneous products with services, and heterogeneous products with services. Finally, through numerical experiments, we analyze the changing trends of the optimal pricing, market share and profit of products line with value-added services with some impact factors, such as product quality, service level, consumer sensitivity, and number of products under three different scenarios. We also obtain some managerial implications when an enterprise develops product line with value-added service.

The Moderating Role of Point-of-Purchase Price Information in Consumer Price Perception and Purchase Intention

Aims: Advertised reference prices are one of the contextual prices that have attracted substantial interest. This research proposes the moderating effect of point-of-purchase price information related to product line and other brand prices on consumers’ price perception and purchase intention.
 Methods: Using the literature review of reference prices as a method, it was found that contextual moderators that influence consumer perceptions of point-of-purchase price information were limited. Consequently, integrating the literature of advertised reference prices and the literature gap in this field leads to the proposition.
 Conclusions: As a result, we propose that product-line prices and prices of other brands moderate the effect of an advertised reference price on the perceived value of consumers, the benefits of search, and the intention to purchase. Hence, the impact of advertised reference prices may be mitigated to a certain extent, which may reduce the deceptiveness of the advertised reference prices.

Discrete Choice Models with Ambiguity Aversion: Product Line Pricing and Competition

Discrete Choice Models with Ambiguity Aversion: Product Line Pricing and Competition

Heuristic pricing rules not requiring knowledge of the price response function

Heuristic rules are appropriate, if a decision maker wants to set the price of a new product or of a product, whose past price variation is low, and budget limitations prevent the use of marketing experiments or customer surveys. Whereas such rules are not guaranteed to provide the optimal price, generated profits should be as close as possible to their optimal values. We investigate eleven pricing rules that do not require that a decision maker knows the price response function and its parameters. We consider monopolistic market situations, in which sales depend on the price of the respective product only. A Monte Carlo simulation that is more comprehensive than extant attempts found in the literature, serves to evaluate these rules. The best performing rules either hold price changes between periods constant or make them dependent on the previous absolute price difference. These rules also outperform purely random price setting, which we use as benchmark. On the other hand, rules based on arc elasticities or on a loglinear approximation to sales and prices, turn out to be even worse than random price setting. In the conclusion, we discuss how heuristic pricing rules may be extended to deal with product line pricing, additional marketing variables (e.g., advertising, sales promotion, and sales force) and a duopolistic market situation.

Robust product line pricing under the multinomial logit choice model

Incorporating consumer choice behavior into a product line design optimization model enhances the understanding of consumer choices and improves the opportunities to increase profit. Most product line optimization problems assume that parameters are precisely known in consumer choice model. However, the decision maker does not precisely know the model parameters because of insufficient sample data, measurement problems, and other factors. We investigate the problem of establishing robust product line pricing under a multinomial logit model to account for the uncertainty of the valuation parameter. First, we present a nominal product line model to maximize profit. We then establish a robust product line model to maximize the worst-case expected profit, where the valuation parameter lies in an uncertainty set. We consider both single and multiple products development and derive the optimal prices’ closed-form expressions. Through numerical experiments, we illustrate the benefit of robust product line pricing to address parameter uncertainty. We demonstrate that the difference between the expected nominal profit and the worst-case profit increases with the increase of the interval of the uncertainty set, and the robust profit relative to the worst-case nominal profit improves. The robust product line design can ensure steadier, even higher profit.

Estimating Demand with Substitution and Intraline Price Spillovers

Problem definition: Standard choice models used to optimize product line prices are effective at capturing the effects of prices on the affordability of products but do not incorporate intraline price spillovers, or the effects of prices on consumer preferences for branded product lines. To date, no approach exists to measure such spillovers, and thus their existence and characteristics are subject to controversy. Academic/practical relevance: Different authors have proposed that different product line items, here referred to as known value items (KVIs), generate price spillovers. Yet product line prices and quality levels are typically highly correlated, and thus it is not clear which spillovers should be modeled. No empirical approach exists to test for multiple price spillovers simultaneously while controlling for quality spillovers. Methodology: This study proposes an empirical approach that includes a choice model to abstract rich demand patterns and an estimation algorithm that addresses the endogeneity and collinearity of KVI prices. An empirical application based on vehicle choice data illustrates how the approach can be implemented in practice and demonstrates the importance of modeling spillovers while yielding interesting managerial implications. Results: The results establish that different KVIs generate separate spillovers and illustrate their distinct roles. KVI price spillovers can be economically important, inducing large cross-price elasticities that range from −1.31 to 0.72. Furthermore, neglecting spillovers can bias own-price elasticity estimates by up to 15% and cross-price elasticities by more than 100%. Managerial implications: The empirical results generate KVI-specific insights that managers in the automobile industry can use to improve their pricing strategies. For other industries, the paper proposes an approach and an implementation algorithm that managers can use to estimate spillovers and optimize product line prices. The empirical application illustrates the implementation of the approach and shows how managers can model price spillovers to increase profits by almost 3%.

Product Line Pricing under Marginal Moment Model with Network Effect

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.

Product-Line Pricing Under Discrete Mixed Multinomial Logit Demand

We study a product-line price optimization problem with demand given by a discrete mixed multinomial logit (MMNL) model. The market is divided into a finite number of market segments, with product demand in each segment governed by the multinomial logit (MNL) model. We show that the concavity property with respect to the choice probability vector shown for the MNL model breaks down under MMNL even for entirely symmetric price sensitivities. In addition, the equal markup property identified for the MNL model no longer holds under MMNL, suggesting that heterogeneity in customer population justifies non-equal-markup pricing. In this paper, we characterize the profit function under MMNL as the sum of a set of quasiconcave functions and present efficient optimization algorithms. We demonstrate the application of our methods using data from Intel Corporation. Our results show that the optimal prices exploit segment differences through redistribution of sales and profit among customer segments. In addition, we use our methods to generate the profit-share efficient frontier, helping the firm to set prices that effectively balance these two measures. The tools developed in this research function in three important ways at Intel: (1) they provide a new alternative for market share prediction among Intel products for different customer segments, adding to the suite of independent demand forecasting tools; (2) they optimize product prices based on segment-specific customer preferences revealed through sales data, a capability that Intel’s current pricing tools include only heuristically; (3) they quantify the trade-off between profit and market share, adding a new decision support capability to the company. The online appendix is available at https://doi.org/10.1287/msom.2017.0675 .

An efficient method for joint product line selection and pricing with fixed costs

In this paper, we propose an exact solution approach to solve a joint product line selection and pricing problem with a fixed cost factor. We adopt the multinomial logit model to estimate the sales of each marketed product, and suppose that the introduction of each product to the market incurs some constant fixed costs. Utilizing an implicit function form of the optimal price, we transform the original problem into the one with the decision variables for the product introduction only. The efficiency of the proposed transformation approach is demonstrated through simulations. We further discuss its applicability to generalized problems.

Estimating Demand With Substitution and Intraline Price Spillovers

Standard choice models used to optimize product line prices are effective at capturing the effects of prices on the affordability of products but do not incorporate intraline price spillovers, or the effects of prices on consumer preferences for branded product lines. To date, no approach exists to measure such spillovers, and thus their existence and characteristics are subject to controversy. Different authors have proposed that different product line items, here referred to as known value items (KVIs), generate price spillovers. Yet product line prices and quality levels are typically highly correlated, and thus it is not clear which spillovers should be modeled. No empirical approach exists to test for multiple price spillovers simultaneously while controlling for quality spillovers. This study proposes an empirical approach that includes a choice model to abstract rich demand patterns and an estimation algorithm that addresses the endogeneity and collinearity of KVI prices. An empirical application based on vehicle choice data illustrates how the approach can be implemented in practice and demonstrates the importance of modeling spillovers while yielding interesting managerial implications. The results establish that different KVIs generate separate spillovers and illustrate their distinct roles. KVI price spillovers can be economically important, inducing large cross-price elasticities that range from – 1.31 to .72. Furthermore, neglecting spillovers can bias own-price elasticity estimates by up to 15% and cross-price elasticities by more than 100%.The empirical results generate KVI-specific insights that managers in the automobile industry can use to improve their pricing strategies. For other industries, the manuscript proposes an approach and an implementation algorithm that managers can use to estimate spillovers and optimize product line prices. The empirical application illustrates the implementation of the approach and shows how managers can model price spillovers to increase profits by almost 3%.

The effect of product line endpoint prices on vertical extensions

PurposeLiterature in brand extensions has relied greatly on categorization theory and on prototypical models of categorization to explain the affect transfer from a parent brand to its extensions. Drawing on the range theory exemplar models of categorization, this paper aims to show the effects of parent brand endpoint prices on consumer judgments of vertical line extensions.Design/methodology/approachThree experiments have been conducted. Experiment 1 tests the hypothesis that consumers rely on the parent brand price range when making judgments of an upscale extension. Experiment 2 tests the hypothesis that the effect of price range on extension evaluation is mediated by perceived risks for upscale extensions but not downscale extensions. The final experiment shows a boundary condition to the product line range effect on upscale extensions.FindingsThis research shows that upscale extensions are judged more favorably in the context of a wide versus a narrow product line even when the highest endpoints in both product lines are equally close to the extension and that this effect is mediated by perceived consistency and perceived risk. The range effect disappears, however, when consumers have a broad focus in which attention shifts to category endpoint prices, making parent brand prices less diagnostic of upscale extension judgments.Practical implicationsManagers may display a wider range of products and/or reduce prices of low-end models to expand product line price width. In consequence, low-end products become more competitive in terms of price and at the same time improve favorability ratings of the new upscale product.Originality/valueVertical line extensions and product line pricing are important topics to both academics and practitioners. Nonetheless, this is the first research to demonstrate how product line price width can influence consumer perceptions of vertical line extensions.

Optimal depth and timing of price promotions in a vertically differentiated product line

When a monopoly consumer packaged goods seller contemplates a temporary price decrease to promote a particular product, the decision is complicated, due to the potential impacts on demand for its other products. Yet limited research details how a monopoly seller should promote its offerings of different quality. This article proposes a model in which consumers switch from a low- to a high-quality offering in the product line when the latter's price is temporarily reduced. According to this model, the price promotion offers consumers a chance to learn about the high-end option, and some trials will lead to sufficient liking of the high-quality offering that they will continue purchasing it, even after it reverts to its regular (non-promotional) price. However, the quality expectations of these repeat buyers increase, which narrows the positive disconfirmation gap. Eventually, these consumers return to the low-quality option. With these assumptions, the current study determines a dynamically optimal (profit-maximizing) product line pricing and promotion strategy for a seller, which in turn has implications for consumer surplus. Contrary to conventional wisdom, overall consumer surplus decreases over the optimal price promotion cycle. A model extension also investigates a periodical promotion strategy for low-end products, in an effort to induce non-buyers to consume; the seller's profit also improves with this strategy.

Baltika Breweries: Product-line Pricing and Brand Positioning (Case Study)

Baltika Breweries: Product-line Pricing and Brand Positioning (Case Study)

PENGARUH PRODUCT MIX PRICING STRATEGY TERHADAP KEPUTUSAN MENGINAP DI ANGGREK SHOPPING HOTEL BANDUNG (Survei Terhadap Tamu Individu yang Menginap di Anggrek Shopping Hotel Bandung)

There are shopping hotel in Bandung, which are Hyatt Regency Hotel, Sensa Hotel, Aston Braga Hotel & Apartement, Harris Hotel, BTC Hotel and Anggrek Shopping Hotel. Anggrek Shopping Hotel is one of the hotel with two stars classification which is located in heart of the city of Bandung in Martadinata street number 15 where is connecting directly with Riau Junction shopping mall with only 41 rooms and better service than before. Over last two years with new mangement, Anggrek Shopping Hotel is still has fluctuatif occupancy, so that in third years internal management make a new strategy on product and pricing for the guest. The responden of this research is individuals guest who stay in Anggrek Shopping Hotel Bandung. This research was conducted for two months, from September 2012 until October 2012. This type of study is a descriptive and verifikatif, and for method are using survey explanatory method ans simple random sampling technique, and for number of samples to be studies were 100 respondens. The data analysis technique is regression with SPSS 17.0 as the computer software. The data collection technique are interviews and questionnaire distribution. The finding of this research is there an impact of product mix pricing strategy which consists of product line pricing, optional product pricing, and product bundle pricing. On decision to stay. The dimension of product mix pricing strategy which has the highest influence is product bundle pricing and the one with lowest influence is product line pricing. While the most appealing factor of decision to stay is product and service. Suggestion to Anggrek Shopping Hotel Bandung is about internal facilities to increase the interest to stay in Anggrek Shopping Hotel Bandung.

Optimal product line pricing in the presence of budget-constrained consumers

The product line pricing problem is generally defined as a seller's task to determine the optimal prices for each product in a product line while accounting for both demand-side and supply-side restrictions. In this paper, we contribute to the existing literature by incorporating consumers’ budget considerations into the seller's optimisation problem. Despite playing an important role in many applications, such as the pricing of tickets for sporting or theatre seasons, budget constraints have not been considered in the academic literature in the context of product line pricing to date.By building on the assumptions and the model formulation recently proposed in a previous study by [Burkart, W. R. et al. (2012). Product line pricing for services with capacity constraints and dynamic substitution. European Journal of Operational Research, 219(2), 347--359] for standard product line pricing, we propose a number of new mixed-integer linear formulations assuming budget-constrained consumers. The formulations differ in terms of how consumers handle their individual budget limitations. To solve the underlying problems, we propose a customised branch-and-bound procedure that relies on various novel problem-specific bound arguments explicitly exploiting the consumers’ budget limitations. Experimental tests show that the branch-and-bound procedure clearly outperforms IBM ILOG CPLEX, which is unable to solve problems for even medium-sized instances. Furthermore, based on a number of scenarios, we derive managerial insights regarding, e.g., the overall impact of considering budget constraints on the seller's revenue as well as the impact of correctly anticipating the type of consumer purchase behaviour.

The properties of product line prices

We study multi-product Cournot suppliers (a monopoly is a special case) who offer menus of differentiated qualities. Under conditions that include linear and constant-elasticity demand specifications, the equilibrium price for each quality is equal to its price in a single-product Cournot market. A corollary is this: a monopolist who naively ignores the substitutability of her products, by choosing the standalone monopoly price for each quality, successfully implements the optimal discriminatory scheme. Under other reasonable specifications, the equilibrium prices are close to the single-product prices. We also evaluate the impact of minimum quality standards.

Study on the Effect of Product Line Pricing on Loading Efficiency and Logistics Cost

Study on the Effect of Product Line Pricing on Loading Efficiency and Logistics Cost

Logit network pricing

In this paper, we address a pricing problem defined over a transportation network, and where the underlying flow is assigned according to the logit model. This setting yields a nonlinear optimization problem that yet possesses strong combinatorial features. Taking advantage of the model's analytical properties, we characterize its first-order optimality conditions and introduce rules that simplify the network topology, while leaving the structure of optimal solutions unchanged. Based on these results, a class of unimodal instances is identified. Finally, the connection with the more classical problem known as ‘product line pricing’ in economics is emphasized.

Do me‐too brands price lower than the feature pioneer?

PurposeThe purpose of this paper is to investigate the pricing strategies of me‐too brands.Design/methodology/approachThis research estimates an empirical model using a panel data of 20 consumer packaged goods sub‐categories.FindingsMe‐too brands face pricing constraints that restrict them from pricing aggressively versus the feature pioneer. The results show that private label brands have the most flexibility to price aggressively. Line extensions me‐toos and new brand name me‐toos do not cut price. Line extensions of national brands are constrained by their parent brand's prices. New brand names are constrained by the higher costs of launching a new brand name. Thus, it appears that consistent product line pricing and covering the costs of launching a new brand name limit price competition versus the feature pioneer.Research limitations/implicationsThis research is limited by the lack of distribution data, the lack of customer mind‐set measures of brand equity, and the limited number of private label me‐toos in the sample.Practical implicationsFeature pioneers need not worry about price cutting from line extension and new brand name me‐toos. They can set prices to cover their development costs and meet their strategic goals. Without the ability to undercut the feature pioneer, me‐too brands need to utilize other marketing tools to compensate for delayed entry.Originality/valueConventional wisdom suggests a me‐too brand succeeds if it charges a low price as low prices are essential to obtain trial. This paper provides empirical evidence that certain types of me‐too brands are restricted from aggressive price cutting.

Consumer Choice Modeling in Product Line Pricing: Reservation Prices and Discrete Choice Theory

In the literature on product line pricing, consumer choice is often modeled using the max-surplus choice rule. In terms of this concept, consumer preferences are represented by so-called reservation prices and the deterministic decision rule is to choose the product that provides the highest positive surplus. However, the distribution of the reservation prices often seems somewhat arbitrary. In this paper, we demonstrate how reservation prices can be obtained using discrete choice analysis and that these two concepts are not as different as often perceived in the literature. A small example illustrates this approach, using data from a discrete choice model taken from the literature.