Reservation Prices for Product Portfolios Under Uncertainty: the ICEPORT Approach

Abstract

This study rests on three premises. Consumers often make choice decisions considering multiple products from one or more categories. Consumers’ levels of uncertainty with product performance or their own preference are nuanced in such portfolio-level situations. Under such uncertainty, extant approaches for reservation price elicitation do not suffice for product portfolios. Building on these premises, the authors propose ICEPORT, an approach for Incentive Compatible Elicitation of reservation prices for product PORTfolios. ICEPORT is able to capture the range in a consumer’s reservation prices for each individual product and combinations of products on offer. An empirical application in the context of root beer and cheese puffs, and a replication involving MLB merchandise, demonstrate the superior predictive performance of ICEPORT over several alternatives. The authors note, among managerial implications of ICEPORT, its potential for improving pricing decisions. Limitations of this study and future research directions are discussed.

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Notes

  1. 1.

    If bundles can be chosen, each bundle must be defined as an option.

  2. 2.

    Recent articles such as Desai et al. [7] and Moon and Shugan [8] highlight the sustained interest among academics and practitioners in the pricing of product portfolios and bundles.

  3. 3.

    In the case of choice within a single category, the proposed approach works as well, with the assumption that at most one brand (from n options) will be selected, treating the options as strong or perfect substitutes.

  4. 4.

    To simply ask the customer to state up front which of the offerings one would be buy and just implement ICERANGE for that offering would be inappropriate because the customer’s choice depends on one’s RPs for all the products under consideration and their prices. Under the individual rationality and incentive compatibility constraints, the customer could end up not buying any of the offerings if surpluses are negative.

  5. 5.

    Portfolios of three offerings are commonly encountered (e.g., chips, salsa, and a combination; movie ticket, popcorn, and a combination of the two). However, ICEPORT is not limited to a portfolio with just 3 options, as discussed later in this article.

  6. 6.

    The SCi measure is at the individual level. The average across respondents is the “flip” of the hit rate, that is, the hit rate = 1 – average SC. We retain the individual-level SCi measure because it allows us to set up more sensitive tests of within-subject differences, which are not possible with aggregate level hit rate measures.

  7. 7.

    ICERANGE [6] and Dost and Wilken’s [5] BDM-range approach apply for individual products only. Repeated applications of these approaches, one product or bundle at a time, would lead to invalid assessments of RP for reasons discussed earlier. Jedidi et al.’s [24] approach for multiple products was not considered as their focus is more on inferring the market-level RP distributions and not individual-level assessments. Also, their data collection protocol is outside the incentive compatible elicitation framework.

  8. 8.

    We thank Professor Min Ding, Editor-in-Chief, Customer Needs and Solutions, for his suggestions that led to Tables 6 and 7

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Acknowledgements

The authors would like to thank Blake Parker and Tori Penso for their help with the data collection for this project. Special thanks are due to Professor Isa Halafir for insights on the combinatorial auction.

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Correspondence to Rabikar Chatterjee.

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Appendix

Appendix

Elicitation protocol for the empirical application

This study has three phases:

  • Phase 1: You will be asked to reveal the prices you are willing to pay.

  • Phase 2: You will be given the opportunity to make changes to your responses. Your responses will be finalized at this stage and will be binding.

  • Phase 3: The sealed envelope placed in front of you will be opened. This envelope contains the actual prices for Goose Island hand-crafted root beer and Pirate’s Booty Aged White Cheddar Puffs and for the bundle of Goose Island hand-crafted root beer and Pirate’s Booty Aged White Cheddar Puffs. Depending on your responses and the prices in the envelope, there are two possible outcomes. If the price you are willing to pay is higher than the actual price, you will either be required to purchase Goose Island hand-crafted root beer or Pirate’s Booty Aged White Cheddar Puffs or the bundle of Goose Island hand-crafted root beer and Pirate’s Booty Aged White Cheddar Puffs. If your price is lower than the actual price, you will not be given the option to purchase anything.

Fig. 1
figure1

Data Elicitation Phase

Fig. 2
figure2

Calibration Phase

Fig. 3
figure3

Purchase Phase

Fig. 4
figure4

Announcement of the Special Offer and Associated Choice

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Newmeyer, C.E., Venkatesh, R. & Chatterjee, R. Reservation Prices for Product Portfolios Under Uncertainty: the ICEPORT Approach. Cust. Need. and Solut. (2021). https://doi.org/10.1007/s40547-021-00115-y

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Keywords

  • Reservation price
  • Incentive compatible elicitation
  • Measurement
  • Pricing
  • Uncertain valuation