Garrett van Ryzin

Product Line Positioning Without Market Information

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Abstract:
Traditional product line positioning and pricing models assume that firms have full information about the market demand and consumer preferences. In this paper we consider a setting where the firm has limited market information and tries to select its product positioning and pricing strategy optimally in light of this missing market information. To do this, we use competitive ration and maximum regret criteria, which measure (respectively) the percentage and absolute loss relative to the benchmark case where the firm has full knowledge of customer preferences. We provide closed form solutions for the op0itmal product line positioning policies under limited market information for both the case of horizontal and vertically differentiate product lines. Our analysis, while stylizes, provides insights into practices observed in many real world markets. In the case of horizontal differentiation, we show that the optimal decision for both the competitive ration and maximum regret criteria is to position products at equal intervals in the attribute space and to price them identically; that is, to evenly span the product space with uniformly priced versions of the product. For the vertically differentiated case, we show that the optimal policy consists of offering some number of highest quality versions, which we call nested quality offerings. We show in this case that the more ambiguity there is over customers' taste for quality, the more product versions the firm should offer.

Source: Decision, Risk, and Operations Working Paper Series
Exact Citation:
Eren, S., and G. van Ryzin. "Product Line Positioning Without Market Information." Decision, Risk, and Operations Working Paper Series, Columbia Business School, 2006.
Date: 2006