A Dynamic Model of Repositioning

Abstract

Consumer preferences change through time and firms must adjust their product positioning for their products to continue to be appealing to consumers. These changes in product positioning require fixed investments such that firms reposition only occasionally. I construct a model that can include predictable and unpredictable consumer preference changes, and where a firm optimally repositions its product given the current market conditions, and expected future repositionings. When unpredictable consumer preferences evolve away from a current firm’s positioning, the decision to reposition is like exercising an option to be closer to current consumer preferences, or waiting to reposition later or for those preferences to return so as to be closer to the firm’s current position. We characterize this optimal repositioning strategy, how it depends on the discount factor, variance of preferences, and repositioning costs. I compare the optimal policy of the firm with what could be optimal from a social welfare point of view, and find that the firm repositions more frequently than is efficient when there is full market coverage. With predictable changes in consumer preferences, the optimal repositioning strategy involves overshooting and asymmetric repositioning thresholds. The online appendix is available at https://doi.org/10.1287/mksc.2017.1075 .