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Consumer Choice Models with Endogenous Network Effects

Management Science, Forthcoming

47 Pages Posted: 17 Sep 2014 Last revised: 17 Jul 2016

Ruxian Wang

Johns Hopkins University - Carey Business School

Zizhuo Wang

University of Minnesota - Industrial & System Engineering

Date Written: September 15, 2014

Abstract

Network externality arises when the utility of a product depends not only on its attributes, but also on the number of consumers who purchase the same product. In this paper, we propose and analyze consumer choice models that endogenize such network externality. We first characterize the choice probabilities under such models and conduct studies on comparative statics. Then we investigate the assortment optimization problem under such choice models. Although the problem is generally NP-hard, we show that a new class of assortments, called quasi-revenue-ordered assortments, which consist of a revenue-ordered assortment plus at most one additional item, are optimal under mild conditions. We also propose an iterative estimation method to calibrate such choice models, for both uncensored and censored data cases. An empirical study on a mobile game dataset shows that our proposed model can provide better fits for the data, increase the prediction accuracy for consumer choices and potentially increase revenue.

Keywords: revenue management; discrete choice models; mulitnomial logit; endogenous effects; network externality; assortment planning; revenue-ordered assortment; quasi-revenue-ordered assortment

Suggested Citation

Wang, Ruxian and Wang, Zizhuo, Consumer Choice Models with Endogenous Network Effects (September 15, 2014). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2496649 or http://dx.doi.org/10.2139/ssrn.2496649

Ruxian Wang (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Zizhuo Wang

University of Minnesota - Industrial & System Engineering ( email )

111 Church Street S.E.
Minneapolis, MN 55455
United States

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