Optimal Product Design Under Price Competition

Engineering optimization methods for new product development model consumer demand as a function of product attributes and price in order to identify designs that maximize expected profit. However, prior approaches have ignored the ability of competitors to react to a new product entrant; thus these methods can overestimate expected profit and select suboptimal designs that perform poorly in a competitive market. We propose an efficient approach to new product design accounting for competitor pricing reactions by imposing Nash and Stackelberg conditions as constraints, and we test the method on three product design case studies from the marketing and engineering design literature. We find that a Stackelberg leader strategy generates higher profit than a Nash strategy. Both strategies are superior to ignoring competitor reactions: In our case studies, ignoring price competition results in overestimation of profits by 12%–79%, and accounting for price competition increases realized profits by up to 3.4%. The efficiency, convergence stability, and ease of implementation of the proposed approach enables practical implementation for new product design problems in competitive markets.