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Pricing and composition of bundles with constrained multinomial logit

Author

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  • Juan Pérez
  • Héctor López-Ospina
  • Alejandro Cataldo
  • Juan-Carlos Ferrer

Abstract

In this paper, we propose an extension of the problem of bundling with multinomial logit, making an explicit inclusion of the consumers’ maximum willingness to pay (MWTP) by means of the constrained multinomial logit (CMNL). In the bundling problem, we determine the price and the composition of bundles offered for a single segment of consumers by a firm, which is competing with others in the market, and we compare this result to a base case in which the consumers’ MWTP is not considered. We assume these consumers as rational since they choose the bundle that maximise their utility and the bundle price is within their MWTP. The resulting model is a non-linear mixed integer programme which is solved in two steps: (i) pricing is the first step; the prices are numerically determined in a fixed point equations system and (ii) in the second step the composition of the bundle is determined by explicit enumeration. The results show that the price obtained is less than the one got in the case without CMNL (and bigger than the costs), and the composition of the offered bundle is different as well. It is possible to conclude that not considering the consumers’ MWTP in the context of the problem of bundling will imply an overestimation of the firm’s profit. We have analysed as well the results for a Chilean telecommunications company. These results show the importance of including the MWTP in the pricing and composition process.

Suggested Citation

  • Juan Pérez & Héctor López-Ospina & Alejandro Cataldo & Juan-Carlos Ferrer, 2016. "Pricing and composition of bundles with constrained multinomial logit," International Journal of Production Research, Taylor & Francis Journals, vol. 54(13), pages 3994-4007, July.
    • Handle: RePEc:taf:tprsxx:v:54:y:2016:i:13:p:3994-4007
    DOI: 10.1080/00207543.2016.1170905
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    Citations

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    Cited by:

    1. Chen, Ting & Shan, Feifei & Yang, Feng & Xu, Fengmei, 2023. "Online retailer bundling strategy in a dual-channel supply chain," International Journal of Production Economics, Elsevier, vol. 259(C).
    2. Kassahun, Habtamu Tilahun & Swait, Joffre & Jacobsen, Jette Bredahl, 2021. "Distortions in willingness-to-pay for public goods induced by endemic distrust in institutions," Journal of choice modelling, Elsevier, vol. 39(C).
    3. Armando Meza & Paolo Latorre & Milena Bonacic & Héctor López-Ospina & Juan Pérez, 2024. "Optimizing Inventory and Pricing for Substitute Products with Soft Supply Constraints," Mathematics, MDPI, vol. 12(11), pages 1-23, June.
    4. Page, Kenneth & Pérez, Juan & Telha, Claudio & García-Echalar, Andrés & López-Ospina, Héctor, 2021. "Optimal bundle composition in competition for continuous attributes," European Journal of Operational Research, Elsevier, vol. 293(3), pages 1168-1187.
    5. Juan Pérez & Héctor López-Ospina, 2022. "Competitive Pricing for Multiple Market Segments Considering Consumers’ Willingness to Pay," Mathematics, MDPI, vol. 10(19), pages 1-32, October.

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