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Consumer Preferences and Product-Line Pricing Strategies: An Empirical Analysis

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Author Info

  • Michaela Draganska

    ()
    (Graduate School of Business, Stanford University, Stanford, California 94305-5015)

  • Dipak C. Jain

    ()
    (Kellogg School of Management, Northwestern University, Evanston, Illinois 60208-2001)

Abstract

Firms often differentiate their product lines vertically to capture consumers' differential willingness to pay for quality. Additionally, many firms offer products varying not in quality but in characteristics such as scent, color, or flavor, that relate to horizontal differentiation. For example, in the yogurt category, each manufacturer carries several product lines differing in quality and price, but within each line there is an assortment of flavors that is uniformly priced. To better understand these product-line pricing strategies, we address two key issues. First, how do consumers perceive product-line and flavor attributes? Second, given consumers' preferences, is the current strategy of pricing product lines differently, but offering all flavors within a product line at the same price, optimal? We find that consumers value line attributes more than flavor attributes. Our analysis reveals that firms exploit these differences in consumer preferences by using product lines as a price discrimination tool. However, firms' profits would not significantly increase if they were to price flavors within a product line differently. Therefore, the current pricing policy of setting different prices for product lines, but uniform prices for all flavors within a line, appears to be on target.

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File URL: http://dx.doi.org/10.1287/mksc.1050.0126
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Bibliographic Info

Article provided by INFORMS in its journal Marketing Science.

Volume (Year): 25 (2006)
Issue (Month): 2 (03-04)
Pages: 164-174

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Handle: RePEc:inm:ormksc:v:25:y:2006:i:2:p:164-174

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Related research

Keywords: product-line pricing; competitive strategy; product assortment;

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Cited by:
  1. Shao, Xiao-Feng, 2012. "Demand-side reactive strategies for supply disruptions in a multiple-product system," International Journal of Production Economics, Elsevier, vol. 136(1), pages 241-252.
  2. Basov, Suren & Danilkina, Svetlana & Prentice, David, 2009. "When does variety increase with quality?," MPRA Paper 13445, University Library of Munich, Germany.
  3. Catherine Thomas, 2011. "Too Many Products: Decentralized Decision Making in Multinational Firms," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 280-306, February.
  4. Ron Borzekowski & Raphael Thomadsen & Charles Taragin, 2005. "Competition and price discrimination in the market for mailing lists," Finance and Economics Discussion Series 2005-56, Board of Governors of the Federal Reserve System (U.S.).
  5. Rajagopalan, S. & Xia, Nan, 2012. "Product variety, pricing and differentiation in a supply chain," European Journal of Operational Research, Elsevier, vol. 217(1), pages 84-93.
  6. Sofia Berto Villas-Boas, 2007. "Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 625-652.
  7. Empen, Janine, 2011. "Preissetzung Auf Dem Deutschen Joghurtmarkt: Eine Hedonische Analyse," 51st Annual Conference, Halle, Germany, September 28-30, 2011 115362, German Association of Agricultural Economists (GEWISOLA).
  8. Andrew Eckert & Douglas West, 2013. "Proliferation of Brewers’ Brands and Price Uniformity in Canadian Beer Markets," Review of Industrial Organization, Springer, vol. 42(1), pages 63-83, February.
  9. Michaela Draganska & Michael Mazzeo & Katja Seim, 2009. "Beyond plain vanilla: Modeling joint product assortment and pricing decisions," Quantitative Marketing and Economics, Springer, vol. 7(2), pages 105-146, June.
  10. Ganesh Iyer & P. Seetharaman, 2008. "Too close to be similar: Product and price competition in retail gasoline markets," Quantitative Marketing and Economics, Springer, vol. 6(3), pages 205-234, September.

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