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Product Variety and Endogenous Pricing with Evaluation Costs

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  • J. Miguel Villas-Boas

    () (Haas School of Business, University of California, Berkeley, Berkeley, California 94720)

Abstract

One important decision firms must make is to select the product line (characteristics and number of products) to offer consumers. This paper explores the effect of the interaction between consumer evaluation costs and pricing on the optimal product line length to offer consumers. Before deciding to buy a product among all products offered, a consumer learns the product line length. Given the product line length, a consumer decides whether to evaluate the products available and their prices. This decision to evaluate depends on the expected consumer surplus after the evaluation being greater than the evaluation costs. When the firm offers few products, the firm may not attract many consumers because of lack of product fit and may be forced to offer low prices. When the firm offers many products, all consumers will find a great product fit; that is, the variance of consumer valuations per product chosen is lower. This allows the firm to charge high prices to extract ex post consumer surplus, resulting in lower ex ante expected consumer surplus, which may lead consumers not to evaluate the products in the first place. That is, by offering fewer products a firm can commit not to extract all possible consumer surplus. These two forces may then lead to the existence of an interior optimal number of products to offer. The optimal number of products offered is decreasing in the evaluation costs.

Suggested Citation

  • J. Miguel Villas-Boas, 2009. "Product Variety and Endogenous Pricing with Evaluation Costs," Management Science, INFORMS, vol. 55(8), pages 1338-1346, August.
  • Handle: RePEc:inm:ormnsc:v:55:y:2009:i:8:p:1338-1346
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    File URL: http://dx.doi.org/10.1287/mnsc.1090.1024
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Armstrong, Mark, 2016. "Ordered Consumer Search," MPRA Paper 72194, University Library of Munich, Germany.
    2. Yong Chao & Lin Liu & Dongyuan Zhan, 2016. "Vertical Probabilistic Selling under Competition: the Role of Consumer Anticipated Regret," Working Papers 16-14, NET Institute.
    3. Nagler, Matthew G., 2015. "Trading off the benefits and costs of choice: Evidence from Australian elections," Journal of Economic Behavior & Organization, Elsevier, vol. 114(C), pages 1-12.
    4. Sanjay Jain, 2012. "Self-Control and Incentives: An Analysis of Multiperiod Quota Plans," Marketing Science, INFORMS, vol. 31(5), pages 855-869, September.
    5. Dmitri Kuksov & J. Miguel Villas-Boas, 2010. "When More Alternatives Lead to Less Choice," Marketing Science, INFORMS, vol. 29(3), pages 507-524, 05-06.
    6. Rhodes, Andrew, 2011. "Multiproduct pricing and the Diamond Paradox," MPRA Paper 32511, University Library of Munich, Germany.
    7. David Ong & Mengxia Zhang, 2016. "Choice averse behavior and sampling risk: a field experiment with actual shoppers," Framed Field Experiments 00547, The Field Experiments Website.
    8. Liang Guo & Juanjuan Zhang, 2012. "Consumer Deliberation and Product Line Design," Marketing Science, INFORMS, vol. 31(6), pages 995-1007, November.
    9. A. Gürhan Kök & Yi Xu, 2011. "Optimal and Competitive Assortments with Endogenous Pricing Under Hierarchical Consumer Choice Models," Management Science, INFORMS, vol. 57(9), pages 1546-1563, February.
    10. Sanjay Jain, 2012. "Marketing of Vice Goods: A Strategic Analysis of the Package Size Decision," Marketing Science, INFORMS, vol. 31(1), pages 36-51, January.

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