Optimal Product Line Pricing for Two Customer Segments with an Extension to Multi-Segment Case

In this paper we consider the problem of determining optimal prices for a product line. Items are distinguished by a single attribute which we call quality and which is proportional to the cost of the item. Demand for an item is dependent on the price differential between the item and the next item with higher cost. Customers can be grouped into two segments based on the lowest features acceptable and the maximum acceptable price. We develop an algorithm to determine the optimal pricing to maximize profit. We also consider assortment decisions to add or drop items based on regularity conditions and optimality considerations.