Abstract:
This article investigates the quality-based segmentation problem in which products offered in the product line are characterized by two conflicting quality attributes. We consider a vertically differentiated market in which consumer quality valuations are probabilistically and continuously distributed. We compare the results in such a setting with the most commonly used setting in the existing literature in which the products only have a single quality attribute and the market segments are represented by deterministic and discrete quality valuations. Our analysis includes two choices that are relevant when designing a product line. The first choice concerns the product line length, which is represented by the choice between the single-product strategy and the two-product strategy. The second choice concerns the distribution channel structure. The manufacturer can sell the products directly to end consumers in a centralized channel or through a retailer in a decentralized channel. We analyse and compare a number of performance measures such as profitability, consumer welfare and cannibalization intensity. Our results show that in case of a product with two conflicting attributes, theway in which the product line length and the distribution channel structure affect the performance measures mentioned above differs from the effects found when a product has a single quality attribute only. We also show that the continuously distributed quality valuations make the decision on whether to capture the market fully or partially highly relevant and important when making the quality-based segmentation decisions.
