TITLE

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

AUTHOR(S)
Orhun, A. Yeşim
PUB. DATE
September 2009
SOURCE
Marketing Science;Sep/Oct2009, Vol. 28 Issue 5, p868
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
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.
ACCESSION #
47192289

 

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