The effect of buyer choice rules on product line design and pricing

This dissertation is concerned with the effect of buyer choice rules on product line design and pricing. Specifically, we address the problem of which products to offer and how to price them to maximize total profit under two different buyer choice rules, the deterministic max-surplus and the probabilistic Bradley-Terry-Luce (BTL) choice rules. Although the relevance of probabilistic choice rules is well acknowledged in the marketing and management science literature, to the best of our knowledge, there is no existing research that seeks to optimize the product line design and pricing problem under BTL choice.;Chapter 2 provides background on models of customer preferences and surveys the literature on both buyer choice rules and product-line optimization. Chapter 3 gives formal problem descriptions under the different choice rules and presents properties of the objective function under BTL choice. Although the overall objective function is ill-behaved, we show that the solution space can be divided into well-defined hypercubes for which good search procedures can be developed.;In Chapter 4 we present solution procedures that decompose the original solution space into hypercubes. We use a heuristic to solve the simpler problem within each hypercube and employ two different algorithms based on simulated annealing to find a near-optimum solution among these hypercubes. We also develop a hedging strategy that seeks solutions that are robust to uncertainties in the estimation of customer utility values rather than extreme point solutions that tend to be very sensitive to utility misspecifications. We can also use this approach to extend our model to allow for uncertainty in customer utilities.;In Chapter 5 we demonstrate the effectiveness of the proposed heuristic procedures for solving the BTL model. We also present the results of a robustness test that examines the sensitivity of good solutions to uncertainty in the utilities. In Chapter 6, we analyze characteristics of the solutions of the BTL choice model and the max-surplus model and compare them to each other. We also test the robustness of product line decisions to misspecifications of the choice model. In Chapter 7, we summarize our findings and discuss promising areas for future research.