Does channel decentralization lead to low quality product lines?

Purpose – The purpose of this study is to analyze the problem of optimal product line design in marketing channels. Design/methodology/approach – This paper develops a game theoretic model, in which a firm markets a line of a limited number of products at different quality levels to serve a market composed of multiple consumer segments. The consumer segments are modeled as clusters of somewhat heterogeneous consumers as typically observed in the real world. These model characteristics allow us to consider a broader set of targeting strategies such as sub-segmentation and partial cannibalization which have not been considered previously. By considering both a vertically integrated channel and a decentralized channel, we investigate how channel structure influences optimal product line design. We analyze the model mathematically with supplemental numerical analyses. Findings – Our analysis shows that “quality distortion” in product line design is not limited to the low-end product, as previously reported, but can happen to the high-end product. The direction of these quality distortions may be downward or upward, leading to either increased or decreased differentiation between the two products. Furthermore, channel decentralization makes it more likely for the firm to strategically choose upward partial cannibalization or sub-segmentation. Consequently, contrary to previous studies, we demonstrate that there exist conditions under which channel decentralization leads to higher product quality. Originality/value – Our model reflects a more realistic market environment and a firm’s practical constraints than previous studies, which typically assume perfect homogeneity within each segment and/or the feasibility of offering an infinite number of products. This extension produces interesting new results and insights that provide more practical implications for a firm’s optimal product line design strategy.

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Product line design with vertical and horizontal consumer heterogeneity: the effect of distribution channel structure on the optimal quality and customization levels

European Journal of Marketing ◽

10.1108/ejm-04-2019-0333 ◽

2020 ◽

Vol 55 (1) ◽

pp. 95-131

Author(s):

Parisa Bagheri Tookanlou ◽

Hartanto Wijaya Wong

Keyword(s):

Distribution Channel ◽

Product Line ◽

Channel Structure ◽

Fixed Cost ◽

Content Type ◽

Product Line Design ◽

Segmentation Strategy ◽

Line Extension ◽

Market Coverage ◽

Line Design

Purpose The purpose of this study is to analyze the problem of optimal product line design in marketing channels where consumers are heterogeneous in both horizontal and vertical dimensions. Design/methodology/approach This paper develops a model to evaluate when it is preferable for a firm to extend the product line in a vertical or horizontal direction. Consumers are modeled as being vertically heterogeneous with respect to their valuation of quality and horizontally heterogeneous with respect to their preference on the esthetic component of the product. These model characteristics allow us to consider a broader set of product line extension strategies. By considering both a vertically integrated channel and a decentralized channel, this study investigates how channel structure influences optimal product line design. The problem with supplemental numerical analyses is mathematically analyzed. Findings The analysis shows that a horizontal product line extension strategy that offers the customized product can be used as an alternative to a vertical product line extension strategy. If the fixed cost is not too high, offering the customized product with low quality may be preferred to the quality-based segmentation strategy. Furthermore, the analysis shows that the channel structure is influential as the preference for the horizontal product line extension strategy is more pronounced in the decentralized channel than in the centralized channel. Research limitations/implications The analysis presented in this paper is limited by the consideration of full market coverage. Further research is needed to see how the results can be generalized to the case with partial market coverage. Practical implications The analysis suggests that a firm may consider product customization as part of its product line strategy. Information regarding market characteristics and channel structure is important when deciding on the optimal product line design. Originality/value The model reflects a more realistic marketing strategy and channel structure than previous studies that typically consider product line extension in only one direction and focus on the centralized distribution channel. Combining the standard product line extension and customization strategies also represents an important contribution to the literature. These extensions produce interesting new results and insights into a firm’s optimal product line design strategy.

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Nested bilevel genetic algorithms for game-theoretic optimization of product line design considering competition

2017 IEEE International Conference on Industrial Engineering and Engineering Management (IEEM) ◽

10.1109/ieem.2017.8290248 ◽

2017 ◽

Author(s):

Xiaojie Liu ◽

Gang Du ◽

Roger J. Jiao ◽

Yi Xia

Keyword(s):

Genetic Algorithms ◽

Product Line ◽

Product Line Design ◽

Game Theoretic ◽

Line Design

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A Model of Product Line Marketing

Management Science ◽

10.1287/mnsc.2021.4193 ◽

2021 ◽

Author(s):

Chuan He ◽

Shaowei Ke ◽

Xingtan Zhang

Keyword(s):

Spillover Effect ◽

Product Line ◽

Marketing Effort ◽

Product Lines ◽

Product Line Design ◽

Potential Market ◽

High Utility ◽

The Cost ◽

Consumer Tastes ◽

Line Design

Firms offer a variety of products to meet different customer needs. In many horizontally differentiated markets, prices are stable, and firms make infrequent adjustments to their product lines. Although prior research focused on product line design, we investigate how firms should allocate their marketing effort when their product lines are fixed. We propose a simple model to analyze product line marketing. Our model exhibits a flagship product effect in which the firm’s optimal marketing effort is concentrated, provided that the ratio between consumer tastes dispersion and the convexity of the cost of marketing effort is below a threshold. The flagship product is selected according to a marketing effort allocation index that measures the trade-off between a product’s markup and its potential market share. This result is robust with or without competition and whether prices are exogenous or endogenous. Firms often experience shocks to their marketing cost because of technological improvement or externalities. If a monopolist’s cost of marketing effort declines, she should place more emphasis on a low-utility, high-markup product. Conversely, if the cost increases, the monopolist may find it beneficial to focus her marketing effort on a high-utility, low-markup product. When multiproduct firms compete against each other, we show that if the opponent’s cost of marketing effort decreases, there can be a spillover effect, in which the firm benefits from the opponent’s cost reduction, thereby leading to a win-win situation. This paper was accepted by Dmitri Kuksov, marketing.

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