A Reservation-Price Model for Optimal Pricing of Multiattribute Products in Conjoint Analysis

A significant application of conjoint analysis is in pricing decisions for new products. Conceptually, profit maximization is an important criterion for selecting the price of a product. However, the maximization of profit necessitates estimation of fixed and variable costs, which are difficult to estimate reliably for the large number of products available for evaluation in conjoint analysis. Consequently, users of conjoint models have begun to use a share simulation to screen a small set of attractive products. For each screened product, fixed and variable costs are estimated separately and used to simulate its profits at different price levels. The limitations of this process are pointed out. A model for optimal pricing of screened products in conjoint analysis is presented that incorporates the effect of measurement and estimation error on predicted profits. The model is used in an application to determine the optimal prices for new apartments.