Abstract

This paper addresses the problem of how to determine the composition and price of a bundle so as to maximize the total expected profit. To motivate the problem, we use as a setting a high-tech manufacturing company that operates in a competitive environment, is not a leader in the industry, and is constantly reacting to bundles introduced by the leader. Bundles are sets of components that must meet technical constraints. The company's objective is to build a bundle and offer it in a market where it will compete with other bundles. Consumers purchase the bundle that maximizes their utility after examining all available bundles. The company selection of the bundle's components and its price is made in light of the bundles against which it will be competing and the uncertainty in the consumer choice process. The optimal decision could be found by solving a nonlinear mixed integer program, which is difficult to solve. Instead, we propose an efficient solution procedure to determine the optimal composition of the bundle and the price at which it should be offered. The paper concludes with a brief discussion of extensions of the research to cases that consider multiple segments of customers and/or multiple bundles. © 2007 Production and Operations Management Society.