Positioning and Pricing in a Variety Seeking Market

We study competitive positioning and pricing strategies in markets where consumers seek variety. Variety seeking behavior is modeled as a decrease in the willingness to pay for the product purchased on the previous purchase occasion. Using a three-stage Hotelling-type model, we show that the presence of variety seeking consumers reduces product differentiation offered in equilibrium, thereby explaining some otherwise counterintuitive findings in empirical research. We find that firms charge higher prices in Period 1 and lower prices in Period 2. The lower price in Period 2 represents the price incentive that firms need to offer to prevent the variety seeking consumers from switching. Furthermore, we find that the observed switching in a market may not fully capture the true magnitude of the underlying variety seeking tendencies among consumers. Finally, we show that the presence of variety seeking consumers leads to lower firm profits and a higher consumer surplus. Surplus increases for variety seeking consumers as well as regular consumers. Therefore, the presence of variety seeking consumers benefits everyone in the market

Differentiation, Niche and Cost Leadership Strategies: A Hotelling Based Analysis

Costs are an important determinant of prices charged by firms. The primary purpose of this paper is to study the impact of costs associated with differentiation and niche strategies on firm’s positioning and pricing decisions in a horizontally differentiated market. We analyze both sequential and simultaneous entry cases. In the sequential case, the cost of differentiation is an additional cost incurred by the second entrant and it depends on the degree of differentiation between itself and the first mover. The cost of following a niche strategy is a market level cost affecting both firms whereby firms incur a positive or negative cost if they want to make a niche product. Our analysis provide some surprising results, explains some conflicting empirical observations documented in previous research, and may also be useful for further empirical research in this area by providing sharper predictions about the impact of various types of costs on market outcomes. For example, we find that under some circumstances the cost disadvantaged firm can enjoy higher price-cost margins compared to the cost leader thereby suggesting that higher costs are a blessing in disguise. We also show analytically that a firm following differentiated or niche strategies charges a higher price than the cost leader if the cost of differentiated or niche strategy is sufficiently high and vice versa

Channel Coordination in the Presence of a Dominant Retailer

The retail trade today is increasingly dominated by large, centrally managed “power retailers.” In this paper, we develop a channel model in the presence of a dominant retailer to examine how a manufacturer can best coordinate such a channel. We show that such a channel can be coordinated to the benefit of the manufacturer through either quantity discounts or a menu of two-part tariffs. Both pricing mechanisms allow the manufacturer to charge different effective prices and extract different surpluses from the two different types of retailers, even though they both have the appearance of being “fair.” However, quantity discounts and two-part tariffs are not equally efficient from the manufacturer’s perspective as a channel coordination mechanism. Therefore, the manufacturer must judiciously select its channel coordination mechanism. Our analysis also sheds light on the role of “street money” in channel coordination. We show that such a practice can arise from a manufacturer’s effort to mete out minimum incentives to engage the dominant retailer in channel coordination. From this perspective, we derive testable implications with regard to the practice of street money

Bayesian Estimation of Random-Coefficients Choice Models Using Aggregate Data

This article discusses the use of Bayesian methods for estimating logit demand models using aggregate data, i.e. information solely on how many consumers chose each product. We analyze two different demand systems: independent samples and consumer panel. Under the first system, there is a different and independent random sample of N consumers in each period and each consumer makes only a single purchase decision. Under the second system, the same N consumers make a purchase decision in each of T periods. The proposed methods are illustrated using simulated and real data, and managerial insights available via data augmentation are discussed in detail

Competitive Consequences of Using a Category Captain

Many retailers designate one national brand manufacturer in each product category as a “category captain” to help manage the entire category. A category captain may perform demand-enhancing services such as better shelf arrangements, shelf-space management, and design and management of in-store displays. In this paper, we examine when and why a retailer may engage one manufacturer exclusively as a category captain to provide such service and the implications. We find that demand substitutability of competing brands gives rise to a service efficiency effect—service that expands the category is more effective in increasing a manufacturer\u27s sales and margin than service that shifts demand from a rival\u27s brand. We show that the service efficiency effect may motivate a category captain to provide a service that benefits all brands in the category even though doing so is more costly. We further show that, in categories that are less price competitive, there is higher competition between manufacturers to become the category captain. Consequently, a retailer may obtain better service by using a category captain than by engaging both manufacturers simultaneously. Our findings may help explain why a retailer may rely on a category captain despite concerns regarding opportunism and why there is limited empirical evidence of harm to rival manufacturers

©2008 INFORMS A Price Discrimination Model of Trade Promotions

doi 10.1287/mksc.1070.031

Competitive Consequences of Using a Category Captain

Many retailers designate one national brand manufacturer in each product category as a “category captain” to help manage the entire category. A category captain may perform demand-enhancing services such as better shelf arrangements, shelf-space management, and design and management of in-store displays. In this paper, we examine when and why a retailer may engage one manufacturer exclusively as a category captain to provide such service and the implications. We find that demand substitutability of competing brands gives rise to a service efficiency effect—service that expands the category is more effective in increasing a manufacturer\u27s sales and margin than service that shifts demand from a rival\u27s brand. We show that the service efficiency effect may motivate a category captain to provide a service that benefits all brands in the category even though doing so is more costly. We further show that, in categories that are less price competitive, there is higher competition between manufacturers to become the category captain. Consequently, a retailer may obtain better service by using a category captain than by engaging both manufacturers simultaneously. Our findings may help explain why a retailer may rely on a category captain despite concerns regarding opportunism and why there is limited empirical evidence of harm to rival manufacturers

The Effect of Price Promotions on Variability in Product Category Sales

Our objective in this research is to relate variability in product category sales to promotional activity in the product category, and other category specific characteristics. The findings may be relevant from retailers' perspective as retailers' revenues are more closely related to the sales of the product category as opposed to the sales of any particular brand. We analyze data on about 2,000 brands from 25 different SAMI categories, obtained with the cooperation of a major grocery chain. Our data suggest that an increase in the magnitude of discounts increases the variability in category sales but an increase in the frequency of discounts has an opposite effect. Furthermore, categories which are bulky, or categories where the degree of competitiveness is high, exhibit lower variability in sales.price discounts, product category sales, retailing, sales promotions