Approximation Algorithms for Product Framing and Pricing

Abstract

In “Approximation Algorithms for Product Framing and Pricing,” G. Gallego, A. Li, V.A. Truong, and X. Wang propose one of the first models of “product framing” and pricing. Product framing refers to the way consumer choice is influenced by how the products are framed or displayed. They present a model in which a set of products are displayed or framed into a set of virtual web pages. They assume that consumers consider only products in the top pages with different consumers willing to see different numbers of pages. Consumers select a product, if any, from these pages following a general choice model. They show that the product-framing problem is NP-hard. They derive algorithms with guaranteed performance relative to an optimal algorithm under reasonable assumptions. The algorithms are fast and easy to implement. They also present structural results and design algorithms for pricing under framing effects for the multinomial logit model. They show that, for profit-maximization problems, at optimality, products are displayed in descending order of their value gap and in ascending order of their markups.