Using a menu of geographic pricing plans: A theoretical investigation

In a menu plan of geographic pricing, the retailer allows a customer to choose either a free on board origin (F.O.B, origin) plan, or a uniform delivered plan. In this article, we develop an approach to construct the best menu plan and compare its profitability and market coverage with that of a uniform delivered plan and an F.O.B, origin plan when these are used alone. It is shown that a menu plan can generate at least as much profit as either an F.O.B, origin or a uniform delivered plan used by itself under any demand condition. However, whether the menu plan can outperform the F.O.B. origin and the uniform delivered plans depends on the specific demand conditions. When demand is linear in price and delivery cost is uniformly distributed, it is shown that the menu plan is substantially more profitable than the F.O.B, origin and the uniform delivered plans and generates at least 96% of the contribution of an optimal plan which sets a profit maximizing price for individual customers based on cost. On the other hand, when demand is a constant elasticity function of price, the menu plan is found to be only marginally superior to the F.O.B, origin plan which generates more profit than the uniform delivered plan.