Optimal Selection of Line Extensions: Incorporating Operational, Financial, and Marketing Constraints

Line extensions-variants of existing products with new appearances, functions, or forms-constitute a significant fraction of products launched each year. While line extensions typically share components with existing products, they can also cannibalize the demand of existing products. The choice of an appropriate set of line extensions is an important recurring issue for a firm and they must incorporate constraints that arise naturally from operational, financial, and marketing considerations, resulting in an analytically challenging optimization problem. We consider several variants of this problem, develop efficient heuristics that deliver near-optimal solutions, and derive a variety of interesting insights on the inherent tradeoffs in the selection of line extensions.