Optimal bundle composition in competition for continuous attributes

Kenneth Page, Juan Pérez, Claudio Telha, Andrés García-Echalar and Héctor López-Ospina

European Journal of Operational Research, 2021, vol. 293, issue 3, 1168-1187

Abstract: We propose a model to design bundles’ composition under competition, quantifying its effect in terms of profit and market share in a game among competing firms. According to our literature review, no previous models on optimal bundle composition can handle the competition as we do in this paper. Besides, we explain how a firm designing multiple bundles with equal price obtains a replication of identical bundles and an artificially increased estimation of the firm’s profit and market share, which is a consequence of the well-known Independence of Irrelevant Alternatives Property. To mitigate this effect, we use the Constrained Multinomial Logit Model, which induces differentiation in composition through soft constraints that represent the minimum quantity of the attributes offered in bundles. Although this methodology helps, its use implies more effort to estimate its parameters; nevertheless, these are feasible to be assessed. Firms can use our model to identify the bundles in which they should focus their commercial efforts, given the characteristics of their consumers.

Keywords: Bundling; Optimal composition; Constrained multinomial logit; Competition; Independence of irrelevant alternatives (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:293:y:2021:i:3:p:1168-1187

DOI: 10.1016/j.ejor.2021.01.032

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