Product Line Optimization Considering Network Effects

Products exhibit network effects when the utility a customer obtains from buying a product depends not only on its attributes but also on the sales of the same or similar products. In this article, we study product line optimization problem considering network effects. We first characterize consumer choice model considering network effects. Then we investigate the product line optimization problem under such model. In the homogeneous case with the same products, we find that the optimal choice probabilities and optimal prices may be different for each product. In the heterogeneous case with different products, there is at most one product that takes the “high” market share while all the other products take “low” market share. In particular, when only the network effects are heterogeneous, the larger the network effect, the lower the optimal pricing and the higher the market share. Through numerical experiment, finally, we demonstrate the importance of considering network effects and test the robustness of solutions.