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Market Segmentation Strategies of Multiproduct Firms

Author

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  • Doraszelski, Ulrich

    (Stanford U)

  • Draganska, Michaela

Abstract

We analyze a multiproduct duopoly and ask whether firms should offer general purpose products or tailor their offerings to fit specific consumer needs. There are two effects of offering a targeted product: (i) if a consumer's favorite product is offered, her utility increases because there is a better fit between product and preferences; (ii) if her favorite product is not offered, the consumer's utility decreases because she gets a product that is not tailored to her needs at all. Previous work has not considered these two effects jointly and has therefore not been able to capture the tradeoff inherent in market segmentation: for some consumers utility increases due to increased "fit" whereas for others utility decreases due to increased "misfit." We show that in addition to the degree of fit and misfit, the intensity of competition and the fixed cost of offering an additional product determine firms' market segmentation strategies.

Suggested Citation

  • Doraszelski, Ulrich & Draganska, Michaela, 2003. "Market Segmentation Strategies of Multiproduct Firms," Research Papers 1827, Stanford University, Graduate School of Business.
  • Handle: RePEc:ecl:stabus:1827
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    File URL: http://gsbapps.stanford.edu/researchpapers/library/RP1827.pdf
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    References listed on IDEAS

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    1. Mizuno, Toshihide, 2003. "On the existence of a unique price equilibrium for models of product differentiation," International Journal of Industrial Organization, Elsevier, vol. 21(6), pages 761-793, June.
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    3. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January.
    4. Martinez-Giralt, Xavier & Neven, Damien J, 1988. "Can Price Competition Dominate Market Segmentation?," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 431-442, June.
    5. Thomas von Ungern-Sternberg, 1988. "Monopolistic Competition and General Purpose Products," Review of Economic Studies, Oxford University Press, vol. 55(2), pages 231-246.
    6. Economides, Nicholas, 1989. "Quality variations and maximal variety differentiation," Regional Science and Urban Economics, Elsevier, vol. 19(1), pages 21-29, February.
    7. McKelvey, Richard D. & McLennan, Andrew, 1996. "Computation of equilibria in finite games," Handbook of Computational Economics,in: H. M. Amman & D. A. Kendrick & J. Rust (ed.), Handbook of Computational Economics, edition 1, volume 1, chapter 2, pages 87-142 Elsevier.
    8. Economides, Nicholas, 1993. "Quality variations in the circular model of variety-differentiated products," Regional Science and Urban Economics, Elsevier, vol. 23(2), pages 235-257, April.
    9. Hans M. Amman & David A. Kendrick, . "Computational Economics," Online economics textbooks, SUNY-Oswego, Department of Economics, number comp1.
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    Citations

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    Cited by:

    1. Carlo Reggiani, "undated". "Optimal Differentiation and Spatial Competition: The Spokes Model with Product Delivery," Discussion Papers 09/13, Department of Economics, University of York.
    2. Azar, Ofer H., 2013. "Competitive strategy when consumers are affected by reference prices," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 327-340.
    3. Azar, Ofer H., 2010. "Can more consumers lead to lower profits? A model of multi-product competition," Journal of Economic Behavior & Organization, Elsevier, vol. 76(2), pages 184-195, November.
    4. Carlo Reggiani, 2014. "Spatial Price Discrimination in the Spokes Model," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 23(3), pages 628-649, September.
    5. Azar, Ofer H., 2014. "Optimal strategy of multi-product retailers with relative thinking and reference prices," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 130-140.

    More about this item

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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