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Approximation algorithms for product framing and pricing

Author

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  • Gallego, Guillermo
  • Li, Anran
  • Truong, Van-Anh
  • Wang, Xinshang

Abstract

We propose one of the first models of “product framing” and pricing. Product framing refers to the way consumer choice is influenced by how the products are framed or displayed. We present a model in which a set of products is displayed or framed into a set of virtual web pages. We assume that consumers consider only products in the top pages with different consumers willing to see different numbers of pages. Consumers select a product, if any, from these pages following a general choice model. We show that the product-framing problem is NP-hard. We derive algorithms with guaranteed performance relative to an optimal algorithm under reasonable assumptions. Our algorithms are fast and easy to implement. We also present structural results and design algorithms for pricing under framing effects for the multinomial logit model. We show that, for profit maximization problems, at optimality, products are displayed in descending order of their value gap and in ascending order of their markups.

Suggested Citation

  • Gallego, Guillermo & Li, Anran & Truong, Van-Anh & Wang, Xinshang, 2020. "Approximation algorithms for product framing and pricing," LSE Research Online Documents on Economics 101983, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:101983
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    File URL: https://researchonline.lse.ac.uk/id/eprint/101983/
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    JEL classification:

    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General

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