A dynamic model of repositioning with a Markov-switching regime

Abstract

AbstractRepositioning products and services to entice customers is a key management strategy that requires careful planning, timing, and budget allocation. This study is the first to investigate repositioning strategies by considering a Hotelling-type location model where consumer preferences change over time with short- and long-term uncertainty. This requires the firm to adjust its product positioning to continue to appeal to consumers. A key assumption is that the parameters describing the dynamics of consumer preferences are modulated by a Markov-switching regime representing long-term uncertainty. Further, this study investigates the effects of regime shift intensity on repositioning strategies. We numerically solve a simultaneous ordinary differential equation system to derive a firm’s optimal strategy, represented by repositioning thresholds that depend on the regimes. We find that in the two-regime case, one threshold is monotonic with respect to the regime shift intensity, whereas the other can be non-monotonic. This suggests that a firm should simultaneously consider the value of the current regime and option value of waiting for a regime shift, thus effectively demonstrating the significance of the uncertainty associated with regime-switching.