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

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  • 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.

Suggested Citation

  • Michaela Draganska & Dipak C. Jain, 2006. "Consumer Preferences and Product-Line Pricing Strategies: An Empirical Analysis," Marketing Science, INFORMS, vol. 25(2), pages 164-174, 03-04.
  • Handle: RePEc:inm:ormksc:v:25:y:2006:i:2:p:164-174
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    File URL: http://dx.doi.org/10.1287/mksc.1050.0126
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Emmanuel Fragnière & Angela Lombardi & Francesco Moresino, 2012. "Designing and Pricing Services Based on Customer-Perceived Value: An Airline Company Feasibility Study," Service Science, INFORMS, vol. 4(4), pages 320-330, December.
    3. Nan Xia & S. Rajagopalan, 2009. "Standard vs. Custom Products: Variety, Lead Time, and Price Competition," Marketing Science, INFORMS, vol. 28(5), pages 887-900, 09-10.
    4. Olga Novikova & Dmitriy B. Potapov, 2015. "Empirical Analysis of Consumer Purchase Behavior: Interaction between State Dependence and Sensitivity to Marketing-Mix Variables," HSE Working papers WP BRP 48/MAN/2015, National Research University Higher School of Economics.
    5. Stephen F. Hamilton & Timothy J. Richards, 2009. "Product Differentiation, Store Differentiation, and Assortment Depth," Management Science, INFORMS, vol. 55(8), pages 1368-1376, August.
    6. Ganesh Iyer & P. Seetharaman, 2008. "Too close to be similar: Product and price competition in retail gasoline markets," Quantitative Marketing and Economics (QME), Springer, vol. 6(3), pages 205-234, September.
    7. Suren Basov & Svetlana Danilkina & David Prentice, 2008. "When does Variety increase with Quality?," Working Papers 2008.04, School of Economics, La Trobe University.
    8. Bonnet, Céline & Schain, Jan Philip, 2017. "An empirical analysis of mergers: Efficiency gains and impact on consumer prices," DICE Discussion Papers 244, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    9. Andrew Eckert & Douglas West, 2013. "Proliferation of Brewers’ Brands and Price Uniformity in Canadian Beer Markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 42(1), pages 63-83, February.
    10. 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.
    11. repec:eee:jouret:v:91:y:2015:i:3:p:451-467 is not listed on IDEAS
    12. Junhong Chu & Pradeep K. Chintagunta, 2009. "Quantifying the Economic Value of Warranties in the U.S. Server Market," Marketing Science, INFORMS, vol. 28(1), pages 99-121, 01-02.
    13. Gérard P. Cachon & Christian Terwiesch & Yi Xu, 2008. "On the Effects of Consumer Search and Firm Entry in a Multiproduct Competitive Market," Marketing Science, INFORMS, vol. 27(3), pages 461-473, 05-06.
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    15. 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.
    16. Michaela Draganska & Michael Mazzeo & Katja Seim, 2009. "Beyond plain vanilla: Modeling joint product assortment and pricing decisions," Quantitative Marketing and Economics (QME), Springer, vol. 7(2), pages 105-146, June.
    17. Ron Borzekowski & Raphael Thomadsen & Charles Taragin, 2009. "Competition and price discrimination in the market for mailing lists," Quantitative Marketing and Economics (QME), Springer, vol. 7(2), pages 147-179, June.
    18. S. Sriram & Pradeep K. Chintagunta & Ramya Neelamegham, 2006. "Effects of Brand Preference, Product Attributes, and Marketing Mix Variables in Technology Product Markets," Marketing Science, INFORMS, vol. 25(5), pages 440-456, September.
    19. 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).
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