IDEAS home Printed from https://ideas.repec.org/a/inm/ormksc/v25y2006i3p248-259.html
   My bibliography  Save this article

On the Profitability of Firms in a Differentiated Industry

Author

Listed:
  • Bing Jing

    (Stern School of Business, New York University, 40 West 4th Street, New York, New York 10012)

Abstract

In a model of vertical differentiation, the principal concern of this paper is to identify sufficient conditions for producing a higher- or lower-quality good to be more profitable (in terms of profits and profit margin). Our basic model considers a scenario where the firms' quality levels are fixed and they engage in price competition. Here, our results are three. First, we develop the notion of and show that its (increasing or decreasing) monotonicity in product quality implies that of firm profitability in equilibrium. A firm's relative cost efficiency refers to its quality-adjusted cost (dis)advantage relative to its immediate competitors, for a given distribution of consumer tastes. Second, selling a higher-quality good is more profitable when (defined as the ratio between a firm's quality and unit cost) is increasing in quality. Third, we also establish a set of lower and upper bounds on each firm's profitability. The basic model is then extended in two directions. We examine unit cost functions that demonstrate monotone profitability, even when both quality and price are endogenous variables. We also show that the spirit of relative cost efficiency and its associated sufficient condition hold valid for a logconcave consumer distribution.

Suggested Citation

  • Bing Jing, 2006. "On the Profitability of Firms in a Differentiated Industry," Marketing Science, INFORMS, vol. 25(3), pages 248-259, 05-06.
  • Handle: RePEc:inm:ormksc:v:25:y:2006:i:3:p:248-259
    DOI: 10.1287/mksc.1060.0193
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mksc.1060.0193
    Download Restriction: no

    File URL: https://libkey.io/10.1287/mksc.1060.0193?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. J. Miguel Villas-Boas, 1998. "Product Line Design for a Distribution Channel," Marketing Science, INFORMS, vol. 17(2), pages 156-169.
    2. Rajeev K. Tyagi, 2004. "Technological Advances, Transaction Costs, and Consumer Welfare," Marketing Science, INFORMS, vol. 23(3), pages 335-344, January.
    3. John R. Hauser & Steven M. Shugan, 2008. "Defensive Marketing Strategies," Marketing Science, INFORMS, vol. 27(1), pages 88-110, 01-02.
    4. Jaskold Gabszewicz, J. & Thisse, J. -F., 1980. "Entry (and exit) in a differentiated industry," Journal of Economic Theory, Elsevier, vol. 22(2), pages 327-338, April.
    5. Greg Shaffer & Florian Zettelmeyer, 2004. "Advertising in a Distribution Channel," Marketing Science, INFORMS, vol. 23(4), pages 619-628, November.
    6. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January.
    7. Baohong Sun & Jinhong Xie & H. Henry Cao, 2004. "Product Strategy for Innovators in Markets with Network Effects," Marketing Science, INFORMS, vol. 23(2), pages 243-254, October.
    8. De Fraja, Giovanni, 1996. "Product line competition in vertically differentiated markets," International Journal of Industrial Organization, Elsevier, vol. 14(3), pages 389-414, May.
    9. J. Miguel Villas-Boas, 2004. "Communication Strategies and Product Line Design," Marketing Science, INFORMS, vol. 23(3), pages 304-316, January.
    10. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
    11. Esther Gal-Or, 1983. "Quality and Quantity Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 590-600, Autumn.
    12. Gregory Dobson & Shlomo Kalish, 1988. "Positioning and Pricing a Product Line," Marketing Science, INFORMS, vol. 7(2), pages 107-125.
    13. Yong Liu & Daniel S. Putler & Charles B. Weinberg, 2004. "Is Having More Channels Really Better? A Model of Competition Among Commercial Television Broadcasters," Marketing Science, INFORMS, vol. 23(1), pages 120-133, July.
    14. Itoh, Motoshige, 1983. "Monopoly, product differentiation and economic welfare," Journal of Economic Theory, Elsevier, vol. 31(1), pages 88-104, October.
    15. Ulrich Lehmann-Grube, 1997. "Strategic Choice of Quality When Quality is Costly: The Persistence of the High-Quality Advantage," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 372-384, Summer.
    16. K. Sridhar Moorthy, 1988. "Product and Price Competition in a Duopoly," Marketing Science, INFORMS, vol. 7(2), pages 141-168.
    17. Anderson, Simon P & de Palma, Andre & Nesterov, Yurii, 1995. "Oligopolistic Competition and the Optimal Provision of Products," Econometrica, Econometric Society, vol. 63(6), pages 1281-1301, November.
    18. 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.
    19. Shugan, Steven M, 1984. "Comments on "Pricing a Product Line."," The Journal of Business, University of Chicago Press, vol. 57(1), pages 101-107, January.
    20. Uri Ronnen, 1991. "Minimum Quality Standards, Fixed Costs, and Competition," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 490-504, Winter.
    21. Gal-Or, Esther, 1985. "Differentiated industries without entry barriers," Journal of Economic Theory, Elsevier, vol. 37(2), pages 310-339, December.
    22. K. Sridhar Moorthy, 1984. "Market Segmentation, Self-Selection, and Product Line Design," Marketing Science, INFORMS, vol. 3(4), pages 288-307.
    23. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(1), pages 3-13.
    24. Taylor Randall & Karl Ulrich & David Reibstein, 1998. "Brand Equity and Vertical Product Line Extent," Marketing Science, INFORMS, vol. 17(4), pages 356-379.
    25. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    26. Sridhar Moorthy, K., 1985. "Cournot competition in a differentiated oligopoly," Journal of Economic Theory, Elsevier, vol. 36(1), pages 86-109, June.
    27. Subramanian Balachander & Kannan Srinivasan, 1994. "Selection of Product Line Qualities and Prices to Signal Competitive Advantage," Management Science, INFORMS, vol. 40(7), pages 824-841, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhang, Yu & Huang, Min & Tian, Lin & Cai, Gangshu George & Jin, Delong & Fan, Zhiping, 2023. "Manufacturer’s product line selling strategy and add-on policy in product sharing," European Journal of Operational Research, Elsevier, vol. 308(3), pages 1332-1343.
    2. Wilfred Amaldoss & Woochoel Shin, 2011. "Competing for Low-End Markets," Marketing Science, INFORMS, vol. 30(5), pages 776-788, September.
    3. Raphael Thomadsen, 2007. "Product Positioning and Competition: The Role of Location in the Fast Food Industry," Marketing Science, INFORMS, vol. 26(6), pages 792-804, 11-12.
    4. Bing Jing, 2016. "Lowering Customer Evaluation Costs, Product Differentiation, and Price Competition," Marketing Science, INFORMS, vol. 35(1), pages 113-127, January.
    5. Yoshinari Miyamoto, 2021. "Strategic outsourcing and quality choice: Is a vertical integration model sustainable?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(5), pages 1332-1351, July.
    6. Yu, Yugang & Dong, Yuxuan & Guo, Xiaolong, 2018. "Pricing for sales and per-use rental services with vertical differentiation," European Journal of Operational Research, Elsevier, vol. 270(2), pages 586-598.
    7. Yi-Ling Cheng & Hai-Han Kao, 2019. "Product quality and endogenous firm objectives," Asia-Pacific Journal of Regional Science, Springer, vol. 3(3), pages 813-830, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ji, Xiang & Wu, Jie & Liang, Liang & Zhu, Qingyuan, 2018. "The impacts of public sustainability concerns on length of product line," European Journal of Operational Research, Elsevier, vol. 269(1), pages 16-23.
    2. Justin P. Johnson & David P. Myatt, 2006. "Multiproduct Cournot oligopoly," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 583-601, September.
    3. Yi-Ling Cheng & Shin-Kun Peng, 2012. "Quality and Quantity Competition in a Multiproduct Duopoly," Southern Economic Journal, John Wiley & Sons, vol. 79(1), pages 180-202, July.
    4. Altug, Mehmet Sekip, 2016. "Supply chain contracting for vertically differentiated products," International Journal of Production Economics, Elsevier, vol. 171(P1), pages 34-45.
    5. Palsule-Desai, Omkar D. & Tirupati, Devanath & Shah, Janat, 2015. "Product line design and positioning using add-on services," International Journal of Production Economics, Elsevier, vol. 163(C), pages 16-33.
    6. Dmitri Kuksov & Yuanfang Lin, 2017. "Signaling Low Margin Through Assortment," Management Science, INFORMS, vol. 63(4), pages 1166-1183, April.
    7. Steven M. Shugan & Jihwan Moon & JQiaoni Shi & Nanda S. Kumar, 2017. "Product Line Bundling: Why Airlines Bundle High-End While Hotels Bundle Low-End," Marketing Science, INFORMS, vol. 36(1), pages 124-139, January.
    8. Yunchuan Liu & Tony Haitao Cui, 2010. "The Length of Product Line in Distribution Channels," Marketing Science, INFORMS, vol. 29(3), pages 474-482, 05-06.
    9. Peter-J. Jost, 2023. "Price commitment and the strategic launch of a fighter brand," Quantitative Marketing and Economics (QME), Springer, vol. 21(3), pages 381-435, September.
    10. Yurko, Anna V., 2011. "How does income inequality affect market outcomes in vertically differentiated markets?," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 493-503, July.
    11. A. Ye(scedilla)im Orhun, 2009. "Optimal Product Line Design When Consumers Exhibit Choice Set-Dependent Preferences," Marketing Science, INFORMS, vol. 28(5), pages 868-886, 09-10.
    12. Natalia Fabra & Juan-Pablo Montero, 2022. "Product Lines and Price Discrimination in Markets with Information Frictions," Management Science, INFORMS, vol. 68(2), pages 981-1001, February.
    13. Serguei Netessine & Terry A. Taylor, 2007. "Product Line Design and Production Technology," Marketing Science, INFORMS, vol. 26(1), pages 101-117, 01-02.
    14. Wenbo Cai & Ying-Ju Chen, 2017. "Channel management and product design with consumers’ probabilistic choices," International Journal of Production Research, Taylor & Francis Journals, vol. 55(3), pages 904-923, February.
    15. Bing Jing, 2017. "Behavior-Based Pricing, Production Efficiency, and Quality Differentiation," Management Science, INFORMS, vol. 63(7), pages 2365-2376, July.
    16. Bing Jing, 2016. "Lowering Customer Evaluation Costs, Product Differentiation, and Price Competition," Marketing Science, INFORMS, vol. 35(1), pages 113-127, January.
    17. Anderson, Simon P. & Celik, Levent, 2015. "Product line design," Journal of Economic Theory, Elsevier, vol. 157(C), pages 517-526.
    18. Bing Jing, 2011. "Seller honesty and product line pricing," Quantitative Marketing and Economics (QME), Springer, vol. 9(4), pages 403-427, December.
    19. Justin P. Johnson & David P. Myatt, 2018. "The determinants of product lines," RAND Journal of Economics, RAND Corporation, vol. 49(3), pages 541-573, September.
    20. J. Miguel Villas-Boas, 2004. "Communication Strategies and Product Line Design," Marketing Science, INFORMS, vol. 23(3), pages 304-316, January.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:25:y:2006:i:3:p:248-259. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.