Optimal Price and Promotion for Interdependent Market Segments

Abstract

The model described in this paper was developed to provide guidance for price and promotion decisions in a consumer-goods division doing business in the United States marketplace. Demand is a dynamic function of price and promotion; the total market is divided into M interacting market segments that often have different needs and wants for the product and that can be sent different promotional messages; the segments usually have different price and promotion elasticities. For a given planning horizon, the model determines the optimal price to be charged in the M segments, the optimal promotional budget, and its allocation over the M segments. A convex programming formulation is utilized. The paper discusses the reality of the environment to be modeled, develops the model in relation to this reality, and then provides an empirical illustration of the model.