Product Line Pricing under Marginal Moment Model with Network Effect

Abstract

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.