Optimal product design under price competition

Abstract

Engineering optimization methods for new product development model consumer demand as a function of product attributes and price in order to identify designs that maximize expected profit. However, prior approaches have ignored the ability of competitors to react to a new product entrant. We pose an approach to new product design accounting for competitor pricing reactions by imposing Nash and Stackelberg conditions as constraints, and we test the method on three product design case studies from the marketing and engineering design literature. We find that new product design under Stackelberg and Nash equilibrium cases are superior to ignoring competitor reactions. In our case studies, ignoring price competition results in suboptimal design and overestimation of profits by 12-79%, and we find that a product that would perform well in today's market may perform poorly in the market that the new product will create. The efficiency, convergence stability, and ease of implementation of the proposed approach enable practical implementation for new product design problems in competitive market systems. © 2009 by ASME.