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Full-line or specialization strategy? The negative effect of product variety on product line strategy

  • Matsubayashi, Nobuo
  • Ishii, Yasuaki
  • Watanabe, Kentaro
  • Yamada, Yoshiyasu
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    This paper studies the product line decisions of firms under two consumer segments differing in their quality-sensitivity. We focus on a negative impact of the product variety on the consumers' motivation to purchase, while each product is horizontally differentiated. In the presence of this impact and high fixed costs relative to variable costs, it is shown that when a highly quality-sensitive segment exists, it is always advantageous for the monopoly to specialize in only one product serving this segment. However, the appearance of a competitor can drastically change the product line in the market. Under the duopolistic setting where two firms sequentially determine their product lines, we show that the leader gains a better financial result by offering its product to the low segment for many cases, including the case where no product is offered to the high segment by either of the firms who are in equilibrium. Furthermore, we obtain another interesting result that indicates that the follower's profit can exceed the leader's profit when the quality-sensitivities between the two consumer segments are sufficiently different, even though the two firms are symmetric except for the order of their product offerings.

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    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 196 (2009)
    Issue (Month): 2 (July)
    Pages: 795-807

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    Handle: RePEc:eee:ejores:v:196:y:2009:i:2:p:795-807
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    1. James Brander & Jonathan Eaton, 1982. "Product Line Rivalry," Working Papers 519, Queen's University, Department of Economics.
    2. Rajiv D. Banker & Inder Khosla & Kingshuk K. Sinha, 1998. "Quality and Competition," Management Science, INFORMS, vol. 44(9), pages 1179-1192, September.
    3. Shin-Kun Peng & Takatoshi Tabuchi, 2006. "Spatial Competition in Variety and Number of Stores," IEAS Working Paper : academic research 06-A002, Institute of Economics, Academia Sinica, Taipei, Taiwan.
    4. 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.
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    7. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    8. Kilsun Kim & Dilip Chhajed, 2002. "Product Design with Multiple Quality-Type Attributes," Management Science, INFORMS, vol. 48(11), pages 1502-1511, November.
    9. Matsubayashi, Nobuo, 2007. "Price and quality competition: The effect of differentiation and vertical integration," European Journal of Operational Research, Elsevier, vol. 180(2), pages 907-921, July.
    10. Shin-Kun Peng & Takatoshi Tabuchi, 2007. "Erratum: Spatial Competition in Variety and Number of Stores," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(2), pages 537-537, 06.
    11. Klemperer, Paul, 1992. "Equilibrium Product Lines: Competing Head-to-Head May Be Less Competitive," American Economic Review, American Economic Association, vol. 82(4), pages 740-55, September.
    12. Kim, Kilsun & Chhajed, Dilip, 2000. "Commonality in product design: Cost saving, valuation change and cannibalization," European Journal of Operational Research, Elsevier, vol. 125(3), pages 602-621, September.
    13. Rajeev K. Tyagi, 2000. "Sequential Product Positioning Under Differential Costs," Management Science, INFORMS, vol. 46(7), pages 928-940, July.
    14. Preyas S. Desai, 2001. "Quality Segmentation in Spatial Markets: When Does Cannibalization Affect Product Line Design?," Marketing Science, INFORMS, vol. 20(3), pages 265-283, August.
    15. Sridhar Balasubramanian & Pradeep Bhardwaj, 2004. "When Not All Conflict Is Bad: Manufacturing-Marketing Conflict and Strategic Incentive Design," Management Science, INFORMS, vol. 50(4), pages 489-502, April.
    16. K. Sridhar Moorthy, 1984. "Market Segmentation, Self-Selection, and Product Line Design," Marketing Science, INFORMS, vol. 3(4), pages 288-307.
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