A zero-sum game approach for estimating cross-elasticity price effects

Abstract

Too often, product cannibalization effects are ignored or neglected by modelers trying to forecast demand, quantify price elasticities and ultimately optimize prices. The main reason is that, although well understood, cannibalization effects are hard to measure – and even harder to include in optimization algorithms. Given data-scarcity issues with cross-elasticities, the following analysis proposes an alternative solution to the computationally intensive, commonly infeasible problem of dealing with cannibalization effects in price optimization problems. Although the proposed solution approximates cannibalization effects, it can deliver a result in reasonable computational time frames by leveraging a theoretical game framework for calculating Nash equilibrium in zero-sum games.