Repositioning to sink: The pricing and quality decisions for product line considering the sinking market

Abstract

Opening up new markets (e.g., the sinking market) is one way to boost growth momentum, especially with the decrease in the rate of technological development and the impact of the black swan event (e.g., the COVID-19 pandemic). Considering the difficulty and cost of developing new products, repositioning existing products by a price markdown is an easier way to expand the market. Companies can implement different pricing strategies for different products to target different markets and make extra profits, but products entering the sinking market may deeply erode the original market. Therefore, balancing the advantages and disadvantages of entering the sinking market is a significant challenge for firms selling products as a product line. By building a theoretical model, we investigate the optimal product line repositioning strategy when companies decide to expand the market. First, we examine the optimal conditions for companies to enter a sinking market. We then analyze the optimal product line strategy in the sinking market. Furthermore, we investigate the interaction between repositioning strategy and quality decisions. The main results indicate that with the increase of the consumers’ willingness to pay at the sinking market and the decrease of the production cost, the seller's motivation to enter the sinking market would be greater. More importantly, entering the sinking market with higher quality can also be the optimal decision. What's more, we also find that the seller implementing low-quality repositioning strategy may prefer fiercer product erosion. Interestingly, the consideration of the quality decision would motivate the seller to enter the sinking market more aggressively even when the production cost is relatively high. Yet, this motivation would be weakened when the production cost is relatively low.