Engineering optimization methods for new product development model consumer demand as a function of product attributes and price in order to identify designs that maximize expected profit. However, prior approaches have ignored the ability of competitors to react to a new product entrant. We pose an approach to new product design accounting for competitor pricing reactions by imposing Nash and Stackelberg conditions as constraints, and we test the method on three product design case studies from the marketing and engineering design literature. We find that new product design under Stackelberg and Nash equilibrium cases are superior to ignoring competitor reactions. In our case studies, ignoring price competition results in suboptimal design and overestimation of profits by 12–79%, and we find that a product that would perform well in today’s market may perform poorly in the market that the new product will create. The efficiency, convergence stability, and ease of implementation of the proposed approach enable practical implementation for new product design problems in competitive market systems.
1.
Hauser
, J. R.
, 1988, “Competitive Price and Positioning Strategies
,” Mark. Sci. (Providence R.I.)
0732-2399, 7
(1
), pp. 76
–91
.2.
Choi
, S. C.
, Desarbo
, W. S.
, and Harker
, P. T.
, 1990, “Product Positioning Under Price Competition
,” Manage. Sci.
0025-1909, 36
(2
), pp. 175
–199
.3.
Choi
, S. C.
, Desarbo
, W. S.
, and Harker
, P. T.
, 1992, “A Numerical Approach to Deriving Long-Run Equilibrium Solutions in Spatial Positioning Models
,” Manage. Sci.
0025-1909, 38
(1
), pp. 75
–86
.4.
Shiau
, C. -S.
, and Michalek
, J. J.
, 2009, “Should Designers Worry About Market Structure?
” ASME J. Mech. Des.
0161-8458, 131
(1
), p. 011011
.5.
Choi
, S. C.
, and Desarbo
, W. S.
, 1993, “Game Theoretic Derivations of Competitive Strategies in Conjoint Analysis
,” Marketing Letters
, 4
(4
), pp. 337
–348
. 0002-78206.
Hadjinicola
, G. C.
, 1999, “Product Positioning and Pricing Under Production Cost Considerations
,” Decision Sci.
0011-7315, 30
(3
), pp. 849
–864
.7.
Michalek
, J. J.
, Papalambros
, P. Y.
, and Skerlos
, S. J.
, 2004, “A Study of Fuel Efficiency and Emission Policy Impact on Optimal Vehicle Design Decisions
,” ASME J. Mech. Des.
0161-8458, 126
(6
), pp. 1062
–1070
.8.
Steiner
, W.
, 2008, “A Stackelberg-Nash Model for New Product Design
,” OR Spectrum
, (in press), http://www.springerlink.com/content/t744027513450417http://www.springerlink.com/content/t744027513450417.9.
Horsky
, D.
, and Nelson
, P.
, 1992, “New Brand Positioning and Pricing in an Oligopolistic Market
,” Mark. Sci. (Providence R.I.)
0732-2399, 11
(2
), pp. 133
–153
.10.
Rhim
, H.
, and Cooper
, L. G.
, 2005, “Assessing Potential Threats to Incumbent Brands: New Product Positioning Under Price Competition in a Multisegmented Market
,” Int. J. Res. Mark.
0167-8116, 22
(2
), pp. 159
–182
.11.
Luo
, L.
, Kannan
, P. K.
, and Ratchford
, B. T.
, 2007, “New Product Development Under Channel Acceptance
,” Mark. Sci. (Providence R.I.)
0732-2399, 26
(2
), pp. 149
–163
.12.
Fudenberg
, D.
, and Tirole
, J.
, 1991, Game Theory
, MIT Press
, Cambridge, MA
.13.
Harker
, P. T.
, 1984, “A Variational Inequality Approach for the Determination of Oligopolistic Market Equilibrium
,” Math. Program.
0025-5610, 30
(1
), pp. 105
–111
.14.
Nagurney
, A.
, 1993, Network Economics: A Variational Inequality Approach
, Kluwer Academic
, Boston, MA
.15.
Facchinei
, F.
, and Pang
, J. -S.
, 2003, Finite-Dimensional Variational Inequalities and Complementarity Problems
, Springer
, New York
.16.
Morrow
, W. R.
, 2008, “A Fixed-Point Approach to Equilibrium Pricing in Differentiated Product Markets
,” Ph.D. thesis, University of Michigan, Ann Arbor, MI.17.
Friedman
, J. W.
, 1986, Game Theory With Applications to Economics
, Oxford University Press
, New York
.18.
Konnov
, I.
, 2007, Equilibrium models and variational inequalities
, Elsevier
, Amsterdam
.19.
Ferris
, M. C.
, and Pang
, J. S.
, 1997, “Engineering and Economic Applications of Complementarity Problems
,” SIAM Rev.
0036-1445, 39
(4
), pp. 669
–713
.20.
Ferris
, M. C.
, and Munson
, T. S.
, 2000, “Complementarity Problems in GAMS and the PATH Solver
,” J. Econ. Dyn. Control
0165-1889, 24
(2
), pp. 165
–188
.21.
Anderson
, S. P.
, De Palma
, A.
, and Thisse
, J. F.
, 1992, Discrete Choice Theory of Product Differentiation
, MIT Press
, Cambridge, MA
.22.
Papalambros
, P. Y.
, and Wilde
, D. J.
, 2000, Principles of Optimal Design: Modeling and Computation
, Cambridge University Press
, New York
.23.
Leyffer
, S.
, and Munson
, T.
, 2005, “Solving Multi-Leader-Follower Games
,” Mathematics and Computer Science Division, Argonne National Laboratory, Report No. ANL/MCS-P1243-0405.24.
Luo
, Z. -Q.
, Pang
, J. -S.
, and Ralph
, D.
, 1996, Mathematical Programs With Equilibrium Constraints
, Cambridge University Press
, New York
.25.
Ye
, J. J.
, Zhu
, D. L.
, and Zhu
, Q. J.
, 1997, “Exact Penalization and Necessary Optimality Conditions for Generalized Bilevel Programming Problems
,” SIAM J. Optim.
1052-6234, 7
(2
), pp. 481
–507
.26.
Scheel
, H.
, and Scholtes
, S.
, 2000, “Mathematical Programs With Complementarity Constraints: Stationarity, Optimality, and Sensitivity
,” Math. Oper. Res.
, 25
(1
), pp. 1
–22
. 0002-782027.
Anitescu
, M.
, 2000, “On Solving Mathematical Programs with Complementarity Constraints as Nonlinear Programs
,” Mathematics and Computer Science Division, Argonne National Laboratory, Report No. ANL/MCS-P864-1200.28.
Ralph
, D.
, and Wright
, S. J.
, 2004, “Some Properties of Regularization and Penalization Schemes for MPECs
,” Optim. Methods Software
1055-6788, 19
(5
), pp. 527
–556
.29.
Viswanathan
, J.
, and Grossmann
, I. E.
, 1990, “A Combined Penalty-Function and Outer-Approximation Method for MINLP Optimization
,” Comput. Chem. Eng.
0098-1354, 14
(7
), pp. 769
–782
.30.
Tawarmalani
, M.
, and Sahinidis
, N. V.
, 2004, “Global Optimization of Mixed-Integer Nonlinear Programs: A Theoretical and Computational Study
,” Math. Program.
0025-5610, 99
(3
), pp. 563
–591
.31.
Bonami
, P.
, Biegler
, L. T.
, Conn
, A. R.
, Cornuejols
, G.
, Grossmann
, I. E.
, Laird
, C. D.
, Lee
, J.
, Lodi
, A.
, Margot
, F.
, Sawaya
, N.
, and Wachter
, A.
, 2008, “An Algorithmic Framework for Convex Mixed Integer Nonlinear Programs
,” Discrete Optimization
, 5
(2
), pp. 186
–204
.32.
de la Torre
, S.
, Conejo
, A. J.
, Gabriel
, S. A.
, Shim
, Y.
, and Garcia-Bertrand
, R.
, 2007, “Application of a New Benders Decomposition Method for DC-MPECs to the Bidding Strategy of a Power Producer
,” Proceedings of the Trans-Atlantic INFRADAY
, College Park, MD, Nov. 2.33.
Karlof
, J. K.
, and Wang
, W.
, 1996, “Bilevel Programming Applied to the Flow Shop Scheduling Problem
,” Comput. Oper. Res.
0305-0548, 23
(5
), pp. 443
–451
.34.
Labbe
, M.
, Marcotte
, P.
, and Savard
, G.
, 1998, “A Bilevel Model of Taxation and its Application to Optimal Highway Pricing
,” Manage. Sci.
0025-1909, 44
(12
), pp. 1608
–1622
.35.
Scaparra
, M. P.
, and Church
, R. L.
, 2008, “A Bilevel Mixed-Integer Program for Critical Infrastructure Protection Planning
,” Comput. Oper. Res.
0305-0548, 35
(6
), pp. 1905
–1923
.36.
Train
, K. E.
, 2003, Discrete Choice Methods With Simulation
, Cambridge University Press
, Cambridge, England
.37.
Michalek
, J. J.
, Feinberg
, F. M.
, and Papalambros
, P. Y.
, 2005, “Linking Marketing and Engineering Product Design Decisions via Analytical Target Cascading
,” J. Prod. Innovation Manage.
0737-6782, 22
(1
), pp. 42
–62
.38.
Michalek
, J. J.
, 2005, “Preference Coordination in Engineering Design Decision-Making
,” Ph.D. thesis, University of Michigan, Ann Arbor, MI.39.
Michalek
, J. J.
, Ceryan
, O.
, Papalambros
, P. Y.
, and Koren
, Y.
, 2006, “Balancing Marketing and Manufacturing Objectives in Product Line Design
,” ASME J. Mech. Des.
0161-8458, 128
(6
), pp. 1196
–1204
.40.
Luo
, L.
, Kannan
, P. K.
, Besharati
, B.
, and Azarm
, S.
, 2005, “Design of Robust New Products Under Variability: Marketing Meets Design
,” J. Prod. Innovation Manage.
0737-6782, 22
(2
), pp. 177
–192
.41.
Besharati
, B.
, Luo
, L.
, Azarm
, S.
, and Kannan
, P. K.
, 2006, “Multi-Objective Single Product Robust Optimization: An Integrated Design and Marketing Approach
,” ASME J. Mech. Des.
0161-8458, 128
(4
), pp. 884
–892
.42.
Williams
, N.
, Azarm
, S.
, and Kannan
, P. K.
, 2008, “Engineering Product Design Optimization for Retail Channel Acceptance
,” ASME J. Mech. Des.
0161-8458, 130
(6
), p. 061402
.43.
Plassmann
, H.
, O'Doherty
, J.
, Shiv
, B.
, and Rangel
, A.
, 2008, “Marketing Actions can Modulate Neural Representations of Experienced Pleasantness
,” Proc. Natl. Acad. Sci. U.S.A.
0027-8424, 105
(3
), pp. 1050
–1054
.Copyright © 2009
by American Society of Mechanical Engineers
You do not currently have access to this content.
