Download or read book Pricing, Variety, and Inventory Decisions Under Nested Logit Consumer Choice written by Sari Rida Kalakesh and published by . This book was released on 2006 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt: Retail represents the second largest industry in the United States with nearly $ 4 trillion in annual revenues and a large capital tied-up in retail inventories. However, the Marketing and Economics literature typically study pricing and var iety (assortment) decisions while ignoring inventory costs. This project incorpo rates the important effects of inventory on pricing and variety decisions for a retailer's product line composed of substitutable items. The retailer's custome rs make their buying decisions for items in the product line based on a random u tility function. A popular model for consumer utility (choice) in this situation is the Multinomial Logit Choice (MNL) model. However, MNL suffers from the inde pendence from irrelevant alternative (IIA) property, which basically implies tha t items in the product line are broadly similar. A remedy to this limitation is to adopt a Nested Multinomial Logit (NMNL) choice model, an enhancement of the M NL, which has received little attention in the retail literature. In this project, we study pricing, variety and inventory decisions under NMNL co nsumer choice and within a single-period newsvendor-type inventory setting. We d erive a close-form expression for the retailers expected profit function of pric es, assortment, and inventory levels. We then numerically analyze the structure of a retailer's optimal assortment, prices and inventory levels. To enhance our understanding of the problem, we develop models of different flavors involving d eciding on two out of three basic pricing, variety and inventory decisions befor e considering all three decisions jointly. Specifically, we start by analyzing p ricing and variety decisions while assuming ample supply (i.e., infinite invento ry levels). We then study a second situation where prices are exogenously fixed and the retailer decides on variety and inventory levels. We finally study a thi rd, and perhaps most important, situation where the retailer jointly decides on pricing, variety and inventory. We observe that the optimal prices, assortment and inventory levels have simple structure in all three situations. This sugges ts that "good" practical solutions for the complex problem of joint pricing, var iety and inventory decisions within the realistic setting we consider could be o btained with ease.