Profitability in product line pricing and composition with manufacturing commonalities

Abstract When pricing and composing a product line for optimal profitability, it is important to consider the fixed cost associated with offering each product. However, when similar products are offered, as in most product lines, manufacturing can often utilize common resources for the production of several products. In this paper, we investigate the profitability impact of including these common fixed manufacturing costs in product line pricing and composition decisions. A variable pricing product line model from research by Dobson and Kalish [Dobson, Gregory, Kalish, Shlomo, 1993. Heuristics for pricing and positioning a product-line using conjoint and cost data. Management Science 39 (2), 160–175] is integrated with manufacturing classes set forth by Morgan et al. [Morgan, Leslie Olin, Daniels, Richard L., Kouvelis, Panos, 2001. Marketing/manufacturing trade-offs in product line management. IIE Transactions 33, 949–962] to develop the new model. This new model introduces an improved method for assessing segment choice in a competitive environment of substitute products. Finally, a new solution methodology using a linear discrete reduction model is compared to two generalized genetic algorithms.