Horsky, Dan; Nelson, Paul
March 1992
Marketing Science;Spring92, Vol. 11 Issue 2, p133
Academic Journal
The positioning and pricing of a new brand requires knowledge about the relationship of both demand and cost with potential attribute locations and prices. This paper addresses this problem and illustrates it in the context of the automobile market. Multi-attribute expected utility theory which allows for consumer uncertainty about the brands is used to model individuals' behavior. Attribute weights are estimated from market survey data on brands' attributes and preferences using LINMAP as an estimation procedure. Expected utility is then updated using the multinomial logit model and choice data to account for the observation that stated preferences do not perfectly reflect the eventual choice. It is hypothesized that when faced with an actual choice price may become more important to the consumer, while other attributes may become more or less important than is reflected in stated preferences. The resulting estimated choice probabilities are aggregated to form demand functions facing each brand which depend on all brands' prices and attribute space locations. Assuming there is a price equilibrium in the existing market and that firms have the same variable cost function, variable costs as a function of a brand's attribute levels are estimated. Given the demand and cost functions facing each firm including the potential new entrant, the profit maximizing positioning and pricing of a new brand is analyzed using a game theoretic approach. A solution is sought under the assumption that incumbents react to entry by changing their prices. Possible approaches to the translation of the perceptual attribute positioning of the new brand to physical and engineering attributes are reviewed. Improvements and future extensions of the study are discussed...


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