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Two-stage simulation–optimization profit maximization model

Author

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  • Kenneth Ko

    (Pepperdine University)

Abstract

Companies are interested in maximizing profit, which happens at the individual product level. We introduce a two-stage model which uses both simulation and optimization to maximize the profit of an individual product. We utilize the concept of consumer margin, benefits minus price, as a way for consumers to determine which product within a competitive set to purchase (if any). The purpose of the stage 1 model is to find the consumer margins and standard deviation that will give the most accurate model. Next, the consumer margins and standard deviation are used in the stage 2 model to find the price that will maximize the profit of a given product. The model is illustrated through a case study involving the top 10 selling sedans in the United States in 2019. In short, this paper will help companies to maximize the profit of a given product through using this two-stage simulation–optimization model to find the optimal price for the product.

Suggested Citation

  • Kenneth Ko, 2022. "Two-stage simulation–optimization profit maximization model," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 21(2), pages 140-145, April.
    • Handle: RePEc:pal:jorapm:v:21:y:2022:i:2:d:10.1057_s41272-021-00286-2
    DOI: 10.1057/s41272-021-00286-2
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