Product Design in a Market with Satisficing Customers

26 Pages Posted: 30 Aug 2011

See all articles by Matulya Bansal

Matulya Bansal

Columbia University - Columbia Business School

Costis Maglaras

Columbia University - Columbia Business School, Decision Risk and Operations

Date Written: October 27, 2008

Abstract

We study the product design problem of a revenue-maximizing firm that serves a market where customers are heterogeneous with respect to their valuations and desire for a quality attribute, and are characterized by a perhaps novel model of customer choice behavior. Specifically, instead of optimizing the net utility that results from an appropriate combination of prices and quality levels, customers are “satisficers” in that they seek to buy the cheapest product with quality above a certain customer-specific threshold. This model dates back to Simon’s work in the 1950s and can be thought of as a model of bounded rationality for customer choice. We characterize the structural properties of the optimal product menu for this model, and explore several examples where such preferences may arise.

Suggested Citation

Bansal, Matulya and Maglaras, Costis, Product Design in a Market with Satisficing Customers (October 27, 2008). Columbia Business School Research Paper, Available at SSRN: https://ssrn.com/abstract=1919177 or http://dx.doi.org/10.2139/ssrn.1919177

Matulya Bansal

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Costis Maglaras (Contact Author)

Columbia University - Columbia Business School, Decision Risk and Operations ( email )

New York, NY
United States

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