48 Pages Posted: 15 Oct 2012
Date Written: April 15, 2012
This study focuses on the menus typically found in the marketplace (e.g., restaurants and Internet vendors), where the consumer may choose one or more from dozens of options or menu items, each at a posted price or fee. We show that modeling choices out of the typical menu leads to the “curse of dimensionality,” which transpires in two ways. First, the choice set (all possible menu selections) grows geometrically with the number of items in the menu. Second, the number of interactions among menu items also grows disproportionately to the number of items in the menu. We propose a menu choice model that circumvents these two problems in a feasible and flexible, but parsimonious way. We test the proposed model on data from both Monte-Carlo simulations and find that the proposed approach produces consistent parameter estimates while it significantly reduces the complexity of the problem. We then apply the proposed model to an actual choice experiment where a sample of consumers was asked to make choices from eight menus combining a base system and a subset among 25 optional features. The results indeed show that menu items interact and the proposed approach produces graphical mapping of such interactions. Optimal pricing policy experiment is also conducted.
Keywords: Menu Choice, Auto-logistic model, optimal pricing
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