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Market Segmentation Strategies of Multiproduct Firms

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  • Doraszelski, Ulrich

    (Stanford U)

  • Draganska, Michaela

Abstract

We analyze a multiproduct duopoly and ask whether firms should offer general purpose products or tailor their offerings to fit specific consumer needs. There are two effects of offering a targeted product: (i) if a consumer's favorite product is offered, her utility increases because there is a better fit between product and preferences; (ii) if her favorite product is not offered, the consumer's utility decreases because she gets a product that is not tailored to her needs at all. Previous work has not considered these two effects jointly and has therefore not been able to capture the tradeoff inherent in market segmentation: for some consumers utility increases due to increased "fit" whereas for others utility decreases due to increased "misfit." We show that in addition to the degree of fit and misfit, the intensity of competition and the fixed cost of offering an additional product determine firms' market segmentation strategies.

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Bibliographic Info

Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1827.

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Date of creation: Nov 2003
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Handle: RePEc:ecl:stabus:1827

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  1. Brander, James A & Eaton, Jonathan, 1984. "Product Line Rivalry," American Economic Review, American Economic Association, vol. 74(3), pages 323-34, June.
  2. Martinez-Giralt, Xavier & Neven, Damien J, 1988. "Can Price Competition Dominate Market Segmentation?," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 431-42, June.
  3. Economides, Nicholas, 1989. "Quality variations and maximal variety differentiation," Regional Science and Urban Economics, Elsevier, vol. 19(1), pages 21-29, February.
  4. Andrew Caplin & Barry Nalebuff, 1990. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Cowles Foundation Discussion Papers 937, Cowles Foundation for Research in Economics, Yale University.
  5. Mizuno, Toshihide, 2003. "On the existence of a unique price equilibrium for models of product differentiation," International Journal of Industrial Organization, Elsevier, vol. 21(6), pages 761-793, June.
  6. Economides, Nicholas, 1993. "Quality variations in the circular model of variety-differentiated products," Regional Science and Urban Economics, Elsevier, vol. 23(2), pages 235-257, April.
  7. McKelvey, Richard D. & McLennan, Andrew, 1996. "Computation of equilibria in finite games," Handbook of Computational Economics, in: H. M. Amman & D. A. Kendrick & J. Rust (ed.), Handbook of Computational Economics, edition 1, volume 1, chapter 2, pages 87-142 Elsevier.
  8. von Ungern-Sternberg, Thomas, 1988. "Monopolistic Competition and General Purpose Products," Review of Economic Studies, Wiley Blackwell, vol. 55(2), pages 231-46, April.
  9. Hans M. Amman & David A. Kendrick, . "Computational Economics," Online economics textbooks, SUNY-Oswego, Department of Economics, number comp1, Spring.
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Cited by:
  1. Ofer H. Azar, 2013. "Optimal Strategy Of Multi-Product Retailers With Relative Thinking And Reference Prices," Working Papers 1313, Ben-Gurion University of the Negev, Department of Economics.
  2. Carlo Reggiani, . "Optimal Differentiation and Spatial Competition: The Spokes Model with Product Delivery," Discussion Papers 09/13, Department of Economics, University of York.
  3. Azar, Ofer H., 2010. "Can more consumers lead to lower profits? A model of multi-product competition," Journal of Economic Behavior & Organization, Elsevier, vol. 76(2), pages 184-195, November.

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