A Bi-level algorithm for product line design and pricing

Abstract

Product line design and pricing are crucial activities for a firm's success especially in a competitive market with high product variety. Recent literature has reported various profit-maximization models with product mix and prices as decision variables. Product mix is a discrete variable while price is treated as a continuous variable. Optimizing both mix and price simultaneously can be challenging. This paper utilizes discrete choice model and activity-based costing to formulate market demand and manufacturing cost of a product line and proposes a bi-level algorithm, which uses genetic algorithm for optimizing product mix and differential evolutionary for optimizing prices for a product line. A case study on smart phones is carried out to illustrate this optimization algorithm.