Strategic Product Line Choice under Asymmetric Demand Structure

Abstract

We examine strategic product line choices of manufacturers in a stylised duopoly model where products have asymmetric and interdependent market conditions. We characterise the optimal product line decisions and show that manufacturers always prefer to have head-to-head competition (and never segment markets) when product line setup cost is small relative to profitability of the products. When setup costs are high, symmetric manufacturers may prefer to have asymmetric product lines or market segmentation. We show that high setup costs lead to the market segmentation outcome only if there is no significant market size difference and the level of product substitutability is moderate.