Turf Wars: Product Line Strategies in Markets with Preference Based Segmentation

Abstract

It is often argued that in competitive markets a firm expands its product line to benefit at the expense of its competitor: more products enable a firm to attract higher demand and/or charge higher prices to earn more profits. We show that these conclusions may be reversed, even without market size expansion. In our model, two firms competing in a horizontally differentiated market are located at its two ends, where each end signifies a firm’s home turf. Each firm considers expanding scope by launching a new product that directly attacks the competitor’s turf. We show that an equilibrium exists such that only the stronger turf firm expands scope, but profits can be higher for both firms. This is because scope expansion enables the stronger turf firm to better price discriminate among its customers while minimizing price competition. The competitor responds by lowering price to gain share and earns a higher profit. Thus, higher core prices for the stronger firm translate to higher demand for the competing firm, increasing profit for both. Similar results hold when firms deploy generic or defensive strategies during product line expansion.