Abstract
This paper develops a model for capturing continuous heterogeneity in the joint distribu-tion of reservation prices for products and bundles. Our model is derived from utility theory and captures both within-and among-subject variability. Furthermore, it provides dollarmetric reservation prices and individual-level estimates that allow the ?rm to target customers and develop customized and nonlinear pricing policies.
Our experiments show that, regardless of whether the products are durables or non-durables, the model captures heterogeneity and predicts well. Models that assume homo-geneity perform poorly, especially in predicting choice of the bundle. Furthermore, the methodology is robust even when respondents evaluate few pro?les. Self-stated reservation prices do not have any informational content beyond that con-tained in the basic model. The direct elicitation method appears to understate (overstate) the variation in reservation prices across consumers for low-priced (high-priced) products and bundles. Hence this method yields biased demand estimates and leads to suboptimal product-line pricing policy.
The optimization results show that the product-line pricing policy depends on the degree of heterogeneity in the reservation prices of the individual products and the bundle. A uni-formly high-price strategy for all products and bundles is optimal when heterogeneity is high. Otherwise, a hybrid strategy is optimal.