Optimizing multinomial logit profit functions

Optimizing multinomial logit profit functions

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Article ID: iaor19972075
Country: United States
Volume: 42
Issue: 7
Start Page Number: 992
End Page Number: 1003
Publication Date: Jul 1996
Journal: Management Science
Authors: ,
Keywords: marketing
Abstract:

The multinomial logit model is a standard approach for determining the probability of purchase in product line problems. When the purchase probabilities are multiplied by product contribution margins, the resulting profit function is generally nonconcave. Because of this, standard nonlinear search procedures may terminate at a local optimum which is far from the global optimum. The authors present a simple procedure designed to alleviate this problem. The key idea of this procedure is to find a ‘path’ of prices from the global optimum of a related, but concave logit profit function, to the global optimum of the true (but nonconcave) logit profit function.

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