Durable goods manufacturers often design product lines by segmenting their markets on quality attributes—attributes that exhibit a “more is better” property for all consumers. Since products within a product line are partial substitutes, and consumers can self-select the products they want to purchase, multiproduct firms have to carefully consider the cannibalization problem in designing their product lines. Existing research has analyzed the cannibalization problem for a monopolist who faces consumers who differ in their quality valuations. If lower-quality products are sufficiently attractive, higher-valuation consumers may find it beneficial to buy lower-quality products rather than the higher-quality products targeted to them. That is, lower-quality products can potentially cannibalize higher-quality products. The cannibalization problem forces the firm to provide only the highest-valuation segment with its preferred (efficient) quality. All other segments get qualities lower than their preferred (efficient) qualities. When the cannibalization problem is very severe, the firm may not serve some of the lowest-valuation segments. However, not much is known about how and when the cannibalization problem affects product line design in an oligopoly. Also, consumers may differ not only in their quality valuations but also in their taste preferences. The objective of this paper is to fill these gaps by examining whether the cannibalization problem affects a firm's price and quality decisions in a model with consumer differences in quality valuations, as well as in their taste preferences, in both monopoly and duopoly settings. The paper addresses questions such as the following. With both types of consumer differences, should a firm, even a monopolist, provide efficient quality only to the top segment? Are there conditions under which other segments can also get their preferred quality levels? If so, how do consumer and firm characteristics affect the likelihood of different segments getting their preferred qualities? How does competition affect the firm's choice of qualities? I develop a model in which the market is made up of two segments, with one segment valuing quality more than the other. Consumers within each segment are distributed over Hotelling's (1929) linear city. Consumers in the two segments can have different taste preferences (transportation costs). Firm locations in the two segments may also be different. The paper begins with an analysis of the monopoly case. I find that when both segments are fully covered, the standard self-selection results of the high-valuation segment getting its preferred quality and the low-valuation segment getting less than its preferred quality do hold. Interestingly, when both segments are incompletely covered, under some conditions, the monopolist's price and quality choices are not determined by the cannibalization problem. In these cases, the monopolist finds it optimal to provide each segment with its preferred quality. Thus, the equilibrium quality levels in a secon...

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Product design decisions substantially affect the cost and revenue drivers. A design configuration with commonality can lower manufacturing cost. However, such a design may hinder the ability to extract price premiums through product differentiation. We explicitly investigate the marketing-manufacturing trade-off and derive analytical implications for three possible design configurations: unique, premium-common, and basic-common. Our model considers two distinct segments of consumers. Some of the implications of our analysis are not readily apparent. For example, when the high-quality component is made common, the average quality of the products offered to the two segments increases. One may infer that with higher average quality, higher prices or higher total revenues might ensue. However, this may not be the case, as detailed in the paper. Finally, our analysis provides a useful framework to develop an index that can rank order components in terms of their attractiveness for commonality.Design, Product Design, Commonality, Marketing, Segmentation, Marketing/Manufacturing Interface

This paper analyzes the problems associated with marketing a durable through leases and sales. Academic research in this area has argued that in a monopolistic environment, leasing dominates selling. Hence, leasing and selling should not co-exist and the firm should concentrate its efforts solely on leasing. We show that the relative profitability of leasing and selling hinges on the rates at which leased and sold units depreciate. In particular, we find that leasing does not dominate selling in all cases; if sold units depreciate at a significantly higher rate than leased units, a monopolistic firm is better off by only selling its product. In addition, we find that if leaded and sold products depreciate at different rates, then the optimal strategy for the firm involves a combination of both leasing and selling. We conclude the paper with an empirical analysis of the depreciation rates of leased and sold units of a popular car model. We find that the depreciation rate of leased cars has been significantly lower than the depreciation rate of sold cars.Leasing, Selling, Durable Goods, Automobiles

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