Optimal Pricing and order quantity strategies for a firm offering multiple products facing customers cannibalization and random market demand

Abstract

This paper studies a firm’s profitability problem offering its products into different market segments at differentiated prices. In order to improve the firms’ profitability the firm needs to decide the prices and order quantities allocations for each market segment. In perfect market segmentation, it is assumed that the customers do not cannibalize between market segments. Whereas, in the case of imperfect market segmentation, the customers are assumed to cannibalize from a high price market segment to a lower price segment. Models to determine the optimal strategies for pricing and order quantity for the perfect as well as for the imperfect market segmentations are proposed with both the deterministic and stochastic customers’ demand. The study has shown that the perfect market segmentation always yields higher revenues compared to no segmentation for a firm facing both the deterministic and stochastic demand situations. In addition to this, the study has also shown that when cannibalization exists, a firm is still able to yield higher revenues compared to the case of no market segmentation facing both the deterministic and stochastic demands, however, greater the extent of cannibalization could result substantial losses in the profitability.