Variety and Pricing of Horizontally Differentiated Product Lines
<-- Return to the list
Date: 03-14-2006
Start Time:
1:00pm
End Time: 7:30pm
Speaker: Wally Hopp, Northwestern University
Location: Uris 333
Abstract
Decisions concerning product differentiation lie at the interface of marketing and operations management. In this talk, we will discuss the influence of consumer preferences, operations costs, and competition on the optimal number and price of variants within differentiated product lines. For modeling purposes, we represent consumer preferences with a logit model and the objectives of producers with constant absolute risk aversion utility functions. We also break operations costs into fixed overhead/development costs and ongoing production/supply chain costs.
For the case of a monopolist, we show that reducing product development costs via modular design always makes it attractive to offer greater product variety. However, reducing production/supply chain costs can sometimes motivate a reduction in variety for a risk-averse producer in a multiple-segment market. For the case of two competing firms, we prove that the combined price/variety game has a pure strategy sub game perfect Nash equilibrium (SPNE) and give a sufficient condition for the uniqueness of SPNEs. For the case with competition, we again show that reducing fixed or variable cost usually stimulates increased variety, but when the operations cost structure of one producer is vastly inferior to that of its competitor, reducing operations costs may lead to less variety. We also show that a risk averse producer may occasionally aggressively cut price and increase variety to discourage competition.
Finally, we discuss implications of this line of research for integrated product and supply chain design practices.
Bio
Please visit http://users.iems.northwestern.edu/~hopp/.