A Discussion on Nonlinear Models for Price Decisions in Rating-Based Product Preference Models

Abstract

The purpose of this article is to discuss the application of nonlinear models to price decisions in the framework of rating-based product preference models. As revealed by a comparative simulation study, when a nonlinear model is the true model, the traditional linear model fails to properly describe the true pattern. It appears to be unsatisfactory in comparison with nonlinear models, such as logistic and natural spline, which offer some advantages, the most important being the ability to take into account more than just linear and/or monotonic effects. Consequently, when we model the product preference with a nonlinear model, we are potentially able to detect its ‘best’ price level, i.e., the price at which consumer preference towards a given attribute is at its maximum. From an application point of view, this approach is very flexible in price decisions and may produce original managerial suggestions which might not be revealed by traditional methods.

Keywords:

• Nonlinear models
• Preference models
• Pricing

Mathematics Subject Classification:

• 62J02
• 91B08
• 91B42

Acknowledgments

The authors would like to thank Yuri Staroselskiy for his valuable support in building up the simulation Matlab routines. This research has been supported by the University of Padova CPDA0885130.