Optimal bundle composition in competition for continuous attributes

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

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish
Pages (from-to)1168-1187
Number of pages20
JournalEuropean Journal of Operational Research
Volume293
Issue number3
DOIs
StatePublished - 16 Sep 2021

Bibliographical note

Funding Information:
The corresponding author was supported by FONDECYT projects 11160320 and 11200616 . We also want to thank our student Catalina Aluanlli for her valuable work.

Publisher Copyright:
© 2021 Elsevier B.V.

Keywords

  • Bundling
  • Competition
  • Constrained multinomial logit
  • Independence of irrelevant alternatives
  • Optimal composition

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