Full-line or specialization strategy? The negative effect of product variety on product line strategy

Nobuo Matsubayashi, Yasuaki Ishii, Kentaro Watanabe, Yoshiyasu Yamada

Research output: Contribution to journalArticle

12 Citations (Scopus)

Abstract

This paper studies the product line decisions of firms under two consumer segments differing in their quality-sensitivity. We focus on a negative impact of the product variety on the consumers' motivation to purchase, while each product is horizontally differentiated. In the presence of this impact and high fixed costs relative to variable costs, it is shown that when a highly quality-sensitive segment exists, it is always advantageous for the monopoly to specialize in only one product serving this segment. However, the appearance of a competitor can drastically change the product line in the market. Under the duopolistic setting where two firms sequentially determine their product lines, we show that the leader gains a better financial result by offering its product to the low segment for many cases, including the case where no product is offered to the high segment by either of the firms who are in equilibrium. Furthermore, we obtain another interesting result that indicates that the follower's profit can exceed the leader's profit when the quality-sensitivities between the two consumer segments are sufficiently different, even though the two firms are symmetric except for the order of their product offerings.

Original languageEnglish
Pages (from-to)795-807
Number of pages13
JournalEuropean Journal of Operational Research
Volume196
Issue number2
DOIs
Publication statusPublished - 2009 Jul 16

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Keywords

  • Follower advantage
  • Game theory
  • Marketing
  • Negative externality arising from product variety
  • Product line strategy

ASJC Scopus subject areas

  • Computer Science(all)
  • Modelling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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