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Product Differentiation and Commonality in Design: Balancing Revenue and Cost Drivers

  • Preyas Desai

    ()

    (Fuqua School of Business, Duke University, Durham, North Carolina)

  • Sunder Kekre

    (GSIA, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213-3890)

  • Suresh Radhakrishnan

    (University of Texas, Dallas, Texas)

  • Kannan Srinivasan

    (GSIA, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213-3890)

Registered author(s):

    Product design decisions substantially affect the cost and revenue drivers. A design configuration with commonality can lower manufacturing cost. However, such a design may hinder the ability to extract price premiums through product differentiation. We explicitly investigate the marketing-manufacturing trade-off and derive analytical implications for three possible design configurations: unique, premium-common, and basic-common. Our model considers two distinct segments of consumers. Some of the implications of our analysis are not readily apparent. For example, when the high-quality component is made common, the average quality of the products offered to the two segments increases. One may infer that with higher average quality, higher prices or higher total revenues might ensue. However, this may not be the case, as detailed in the paper. Finally, our analysis provides a useful framework to develop an index that can rank order components in terms of their attractiveness for commonality.

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    File URL: http://dx.doi.org/10.1287/mnsc.47.1.37.10672
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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 47 (2001)
    Issue (Month): 1 (January)
    Pages: 37-51

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    Handle: RePEc:inm:ormnsc:v:47:y:2001:i:1:p:37-51
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    1. Johnson, Eric J & Meyer, Robert J, 1984. " Compensatory Choice Models of Noncompensatory Processes: The Effect of Varying Context," Journal of Consumer Research, Oxford University Press, vol. 11(1), pages 528-41, June.
    2. Kwoka, John E, Jr, 1992. "Market Segmentation by Price-Quality Schedules: Some Evidence from Automobiles," The Journal of Business, University of Chicago Press, vol. 65(4), pages 615-28, October.
    3. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    4. K. Sridhar Moorthy, 1984. "Market Segmentation, Self-Selection, and Product Line Design," Marketing Science, INFORMS, vol. 3(4), pages 288-307.
    5. Taylor Randall & Karl Ulrich & David Reibstein, 1998. "Brand Equity and Vertical Product Line Extent," Marketing Science, INFORMS, vol. 17(4), pages 356-379.
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