Abstract
The present study concerns product diversification. The products differ in size, shape, flavor, fat content, etc., so that the producer can more specifically modify the particular product to the unique requirements of nonhomogeneous customers. The mathematical model assumes diversified demands of nonhomogeneous consumers for an initial unsorted item. The sorting process generates a better match between customer requirements and the actual supply of sorted products. Thus, the implementation of sorting costs allows for an increase in customer demands by adopting product characteristics that are closer to customer needs and tastes. The study also considers the pricing policy for diversified products in order to determine if price discrimination is preferable for attaining the manufacturer’s goal of profit maximization.
Highlights
Heterogeneous Customers.The history of the consumption commodities markets reveals the phenomenon that for decades many innovations have extended the supply of product variety, especially by introducing new products
Using a simple mathematical model, the present paper shows that firms that become generalists and draw on broad resources implement a product strategy that tries to ensure a diversified product
The sorting process closes this gap by generating a better match between customer requirements and the actual supply provided by the sorted products
Summary
Heterogeneous Customers.The history of the consumption commodities markets reveals the phenomenon that for decades many innovations have extended the supply of product variety, especially by introducing new products. We can find a product that may differ from another in shape, size, combination of ingredients, qualifications, color or design, etc., yet the two products still have the same fundamental characteristics even though heterogeneous in many other respects. One example of this process is found in the car industry. Other competitive car manufacturers later entered the market, Ford itself supplied varieties of cars that included many different characteristics such as engine size, car size, color, and additional differentiating features with respect to shape, design, etc. These and several other challenging examples discussed below brought about our decision to investigate the reasons for this development from the perspective of the producer that was probably motivated by profits
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