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Pricing Multiple Products with the Multinomial Logit and Nested Logit Models: Concavity and Implications

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  • Hongmin Li

    (W.P. Carey School of Business, Arizona State University, Tempe, Arizona 85287)

  • Woonghee Tim Huh

    (Sauder School of Business, University of British Columbia, Vancouver, British Columbia V6T 1Z2, Canada)

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.

Suggested Citation

  • Hongmin Li & Woonghee Tim Huh, 2011. "Pricing Multiple Products with the Multinomial Logit and Nested Logit Models: Concavity and Implications," Manufacturing & Service Operations Management, INFORMS, vol. 13(4), pages 549-563, October.
    • Handle: RePEc:inm:ormsom:v:13:y:2011:i:4:p:549-563
    DOI: 10.1287/msom.1110.0344
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