Optimal Product Line Design When Consumers Exhibit Choice Set-Dependent Preferences

In a market of consumers with varying willingness to pay, using product line as a discrimination tool may extract higher profits than serving all consumers with a single product. Local context effects, however, point to yet another consideration in designing product lines: how the appeal of a produc...

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Bibliographic Details
Published in:Marketing science (Providence, R.I.) R.I.), 2009-09, Vol.28 (5), p.868-886
Main Author: Orhun, A. Yesim
Format: Article
Language:English
Subjects:
Analysis
behavioral economics
choice set-dependent preferences
Consumer behavior
Consumer behaviour
Consumer motivation
Consumers
context effects
context management
Customer relations
Discrimination
Exhibitions
Indifference curves
Loss aversion
Management
Marketing
Mathematical optimization
Preferences
price discrimination
Product choice
Product design
Product development
Product labeling
Product lines
product positioning
Product quality
Profitability
Profits
Services
Studies
Sumer
Valuation
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Summary:In a market of consumers with varying willingness to pay, using product line as a discrimination tool may extract higher profits than serving all consumers with a single product. Local context effects, however, point to yet another consideration in designing product lines: how the appeal of a product changes with the context provided by other products in the choice set. I present a model of product line design that incorporates both discrimination and context management goals and offers recommendations for the variety and positioning of products. To this end, the model makes use of a framework that allows preferences to be choice set dependent. Given this framework, I study how the firm manages externalities between products created by such dependencies. The firm creates distortions above and beyond those resulting from discrimination motives alone. For example, in a vertically differentiated market for quality, quality distortions exist even for the consumers with the highest valuations. The range of quality provisions, given the number of products, is compressed as the relative importance of unfavorable comparisons among products increases. Surprisingly, this compression may even lead the firm to forego discrimination among consumers regardless of the cost of offering distinct products.
ISSN:0732-2399
1526-548X
DOI:10.1287/mksc.1080.0449