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Pricing of partially compatible products

Published: 11 June 2007 Publication History

Abstract

In this paper, we examine a duopolistic market where the two firms compete to sell a system of components. Components are digital (firms haveunlimited supply at no marginal cost), and customers are homogeneous in their component preferences. Each customer will assemble a utility maximizing system by purchasing each necessary component from one of the two firms. While components from the same firm are always compatible, pairwise compatibility of components from rival firms may vary; in addition to utility due to the quality of the system purchased, customers have negative utility for purchasing incompatible parts. We investigate algorithms and hardness results for profit-maximizing decisions of the firms with regards to their price-setting, component value-enhancing and compatibility-enabling strategies. The users' behavior can be modeled as a minimum cut computation, and the company's strategies require addressing novel and interesting questions about graph cuts and flows. We develop a polynomial-time algorithm for finding profit-maximizing prices if the qualities and compatibilities are fixed. On the other hand, we show that finding profit-maximizing quality improvements is equivalent to the Maximum Size Bounded Capacity Cut problem, and thus NP-complete. Finally, for the problem of improving compatibilities to maximize the price, we give polynomial approximation hardness results even in very restricted cases, but show that if all components have uniform prices, and quality differences are small, then an approximation can be found in polynomial time.

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cover image ACM Conferences
EC '07: Proceedings of the 8th ACM conference on Electronic commerce
June 2007
384 pages
ISBN:9781595936530
DOI:10.1145/1250910
Permission to make digital or hard copies of all or part of this work for personal or classroom use is granted without fee provided that copies are not made or distributed for profit or commercial advantage and that copies bear this notice and the full citation on the first page. Copyrights for components of this work owned by others than ACM must be honored. Abstracting with credit is permitted. To copy otherwise, or republish, to post on servers or to redistribute to lists, requires prior specific permission and/or a fee. Request permissions from [email protected]

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Published: 11 June 2007

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Author Tags

  1. compatibility
  2. cut
  3. duopoly
  4. graph
  5. pricing

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EC07
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EC07: ACM Conference on Electronic Commerce
June 11 - 15, 2007
California, San Diego, USA

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Overall Acceptance Rate 664 of 2,389 submissions, 28%

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