Product Line Management with Context-Dependent Consumer Choice Behavior
Student thesis: Doctoral Thesis
Related Research Unit(s)
Growing evidence from behavioral studies suggests that consumer preference for a product in a choice set changes with the configuration of the choice set, that is, with the presence or absence, or positioning of other products in the choice context. This dissertation aims to examine the implications of customers' context-dependent choice behavior for a firm's product line management. Specifically, we first investigate the effect on the cannibalization problem in product line design, and hence a firm's profitability from quality discrimination, when consumers think in context with context-dependent preferences. In classical product line design, the cannibalization problem induced by consumers' self-selection among the offered products undermines a firm's profitability from quality discrimination, compared with the profit level of perfect discrimination which efficiently offers different quality-price combinations to extract all consumer surplus. However, when consumers self-select from the offered set of products, they evaluate each product by comparing it to other alternatives in the choice set and consequently suffer psychological gains/losses. This leads to an interactive dependence between products in the product line, which affects product cannibalization and the firm's quality discrimination motive. Our results show that whereas the cannibalization problem can be alleviated by the consumers' gain-seeking behavior, it can possibly be aggravated when consumers are loss-averse. We also find that, since consumers' gain seeking fosters quality discrimination, the firm always prefer to quality discriminate between different consumers. More interestingly, with gain seeking consumer behavior, the distortion of the quality of each product is so serve that the firm retrieves non-positive profit from the low-end product but instead puts it into the product menu to induce product comparisons among the consumers. In contrast, despite possibly intensifying cannibalization and decreasing firm profits, consumers' loss aversion may still urge the firm to quality discriminate. Then, we explore the impact of consumers' context-dependent choice behavior on the firm's optimal timing of product introduction for a product line, namely, whether, how, and in what sequence to discriminate the consumers. This problem is cast in a stylized model, where a monopolist firm discriminates two segments of consumers who are heterogeneous in their quality valuation and care more about losses than same-sized gains due to product comparisons. It is found that irrespective of the strategic level of consumer behavior and the firm's ability to commit to future product design, it is undesirable for the firm to release two products to discriminate the market, if consumers' loss sensitivity is sufficiently strong. Differentiation between the two products is reduced as a result of bilateral distortions to the quality provisions toward each other to internalize consumer preference. Therefore, it is only profitable to introduce two products with consumers' medium relative degree of consumer heterogeneity in quality valuation and relatively weak loss sensitivities. Otherwise, the firm releases a single product to either target high-valuation consumers or intertemporally price discriminate consumers. With reactive consumers, it is never optimal for the firm to release two products simultaneously, whereas with strategic consumers, it might be profitable to do so, regardless of the firm's commitment capability. Furthermore, the attractiveness of releasing two products sequentially is enhanced without firm commitment compared to with it when consumers are reactive, while the opposite is true when consumers are strategic.