Pricing Multiple Products with the Multinomial Logit and Nested Logit Models: Concavity and Implications
Manufacturing & Service Operations Management · 2011 · Volume 13 · Issue 4
Abstract
We consider the problem of pricing multiple differentiated products with the nested logit model and, as a special case, the multinomial logit model. We prove that concavity of the total profit function with respect to market share holds even when price sensitivity may vary with products. We use this result to analytically compare the optimal monopoly solution to oligopolistic equilibrium solutions. To demonstrate further applications of the concavity result, we consider several multiperiod dynamic models that incorporate the pricing of multiple products in the context of inventory control and revenue management, and establish structural results of the optimal policies.
Keywords
multinomial logit model, nested logit model, consumer choice, multiproduct pricing, price competition with differentiated products, quantity competition with differentiated products
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