Sequential Product Positioning Under Differential Costs

Abstract

This paper examines the product positioning decisions of firms that enter a market sequentially and that have potentially different cost structures. It shows that if the first mover knows the second mover to have a lower production cost, it positions away from the most attractive location in the market; further, the larger the second-mover's cost advantage, the farther away the first mover positions from the most attractive location. The paper also models uncertainty in the first-mover's mind about the later-entrant's cost structure, and shows that an increase in this uncertainty (in the sense of mean-preserving spread) also makes the first mover position farther from the most attractive location in the market. Overall, this paper suggests that unless the first entrant in a market is certain that the later entrant will not have a superior cost structure, it may be better off leaving the best position in the market vacant and having a niche or fringe product.