A Dynamic Model of Repositioning

Consumer preferences change through time and firms must adjust their product positioning for their products to continue to be appealing to consumers. These changes in product positioning require fixed investments such that firms reposition only occasionally. I construct a model that can include pred...

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Bibliographic Details
Published in:Marketing science (Providence, R.I.) R.I.), 2018-03, Vol.37 (2), p.279-293
Main Author: Villas-Boas, J. Miguel
Format: Article
Language:English
Subjects:
Brand preferences
Consumer preferences
Consumers
Dynamic programming
Forecasts and trends
game theory
innovations
Marketing
Mathematical models
Preferences
product
Repositioning
Social welfare
spatial modeling
Studies
Thresholds
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Summary:Consumer preferences change through time and firms must adjust their product positioning for their products to continue to be appealing to consumers. These changes in product positioning require fixed investments such that firms reposition only occasionally. I construct a model that can include predictable and unpredictable consumer preference changes, and where a firm optimally repositions its product given the current market conditions, and expected future repositionings. When unpredictable consumer preferences evolve away from a current firm’s positioning, the decision to reposition is like exercising an option to be closer to current consumer preferences, or waiting to reposition later or for those preferences to return so as to be closer to the firm’s current position. We characterize this optimal repositioning strategy, how it depends on the discount factor, variance of preferences, and repositioning costs. I compare the optimal policy of the firm with what could be optimal from a social welfare point of view, and find that the firm repositions more frequently than is efficient when there is full market coverage. With predictable changes in consumer preferences, the optimal repositioning strategy involves overshooting and asymmetric repositioning thresholds. The online appendix is available at https://doi.org/10.1287/mksc.2017.1075 .
ISSN:0732-2399
1526-548X
DOI:10.1287/mksc.2017.1075