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Optimal Product Line Design When Consumers Exhibit Choice Set-Dependent Preferences

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  • A. Ye(scedilla)im Orhun

    () (Booth School of Business, The University of Chicago, Chicago, Illinois 60637)

Abstract

In a market of consumers with varying willingness to pay, using product line as a discrimination tool may extract higher profits than serving all consumers with a single product. Local context effects, however, point to yet another consideration in designing product lines: how the appeal of a product changes with the context provided by other products in the choice set. I present a model of product line design that incorporates both discrimination and context management goals and offers recommendations for the variety and positioning of products. To this end, the model makes use of a framework that allows preferences to be choice set dependent. Given this framework, I study how the firm manages externalities between products created by such dependencies. The firm creates distortions above and beyond those resulting from discrimination motives alone. For example, in a vertically differentiated market for quality, quality distortions exist even for the consumers with the highest valuations. The range of quality provisions, given the number of products, is compressed as the relative importance of unfavorable comparisons among products increases. Surprisingly, this compression may even lead the firm to forego discrimination among consumers regardless of the cost of offering distinct products.

Suggested Citation

  • 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.
  • Handle: RePEc:inm:ormksc:v:28:y:2009:i:5:p:868-886
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    File URL: http://dx.doi.org/10.1287/mksc.1080.0449
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    References listed on IDEAS

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    Cited by:

    1. Sürücü, Oktay, 2016. "Welfare improving discrimination based on cognitive limitations," Research in Economics, Elsevier, vol. 70(4), pages 608-622.
    2. Dahremöller, Carsten & Fels, Markus, 2015. "Product lines, product design, and limited attention," Journal of Economic Behavior & Organization, Elsevier, vol. 119(C), pages 437-456.
    3. repec:spr:joecth:v:65:y:2018:i:3:d:10.1007_s00199-017-1035-2 is not listed on IDEAS
    4. Jong-Hee Hahn & Jinwoo Kim & Sang-Hyun Kim & Jihong Lee, 2016. "Price Discrimination with Loss Averse Consumers," Working papers 2016rwp-97, Yonsei University, Yonsei Economics Research Institute.
    5. Sürücü, Oktay & Brangewitz, Sonja & Mir Djawadi, Behnud, 2017. "Asymmetric dominance effect with multiple decoys for low- and high-variance lotteries," Center for Mathematical Economics Working Papers 574, Center for Mathematical Economics, Bielefeld University.
    6. Yuxin Chen & Tony Haitao Cui, 2013. "The Benefit of Uniform Price for Branded Variants," Marketing Science, INFORMS, vol. 32(1), pages 36-50, March.
    7. Liang Guo & Juanjuan Zhang, 2012. "Consumer Deliberation and Product Line Design," Marketing Science, INFORMS, vol. 31(6), pages 995-1007, November.
    8. Avi Goldfarb & Teck-Hua Ho & Wilfred Amaldoss & Alexander Brown & Yan Chen & Tony Cui & Alberto Galasso & Tanjim Hossain & Ming Hsu & Noah Lim & Mo Xiao & Botao Yang, 2012. "Behavioral models of managerial decision-making," Marketing Letters, Springer, vol. 23(2), pages 405-421, June.
    9. Ke Wang & Jinwen Sun & Liang Liang & Xiaoyan Li, 2016. "Optimal contracts and the manufacturer’s pricing strategies in a supply chain with an inequity-averse retailer," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 24(1), pages 107-125, March.

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