Designing a profit-maximizing product line for heterogeneous market

Abstract

Designing product line is important marketing decision that affects the firm's overall performances and profitability. This is particularly important due to the fact that the contemporary markets are characterized by sophisticated and diverse preferences of consumers as well as strong competition. Therefore, to meet market demand, firms prefer to offer a product line instead of a single product. In order to decide both on the number and position of products in its product line, the company should understand the way in which consumers value and choose products. For that purpose, a multi-attribute research technique known as conjoint analysis can be used. At the same time, the company should take into account product and pricing strategy of competitors and the possible competitors’ reactions on its own strategy. For modelling market competition, the concept of the Nash equilibrium appears as an appropriate tool. This paper proposes a model for designing a competitive profit-maximizing product line for a heterogeneous market. Preferences were modelled by a model of partial utilities associated with the corresponding attribute levels, while the logit model is used to transform respondents’ preferences into a potential market share. The problem of optimizing the product line was formulated as a nonlinear binary programming model. Proposed model was tested on the previously published conjoint data set, thus confirming its efficiency and applicability.