Comments on "Pricing a Product Line"

Abstract

The traditional study of markets viewed products as commodities. Each product was identical in every respect. It made sense to assume a common market price for all products because it could be argued that consumers would choose the lowest-priced product. Modern studies of markets have determined that the resulting uniform price can lead to intense price competition. However, there are ways of avoiding such competition. Firms without some permanent production advantage can seek to develop some monopoly power for themselves by making their product different. As a result, the product would compete in a different market where the product had less competition. This strategy can exist as long as specific types of consumer heterogeneity in tastes exist and specific cost structures exist that allow differentiated products to exist. Although only special forms of heterogeneity are consistent with differentiated product markets, we do clearly observe such differentiation and, hence, we must conclude that many markets do have the required special structures. However, we observe also that firms frequently offer a variety of products, often called a product line. One reason may be production economies in the manufacturing of the products. Perhaps shared costs across products give firms offering a variety of products a cost advantage over individual firms offering only one product. Another reason may be the additional consumers attracted by variety. These consumers may find some advantage in doing all their shopping with one firm. These consumers may be willing to pay a premium for variety and, hence, to provide firms with an incentive to carry a product line. Still another reason for carrying a product line may be to balance risks or seasonal demand. Investigation of these fundamental motivations behind the existence of a product line will definitely provide important topics for future research. Pricing a Product Line, by Shmuel Oren, Stephen Smith, and