Multi‐Product Quality Competition: Impact of Resource Constraints

Abstract

W e study a multi-product firm with limited capacity where the products are vertically (quality) differentiated and the customer base is heterogeneous in their valuation of quality. While the demand structure creates opportunities through proliferation, the firm should avoid cannibalization between its own products. Moreover, the oligopolistic market structure puts competitive pressure and limits the firm's market share. On the other hand, the firm has limited resources that cause a supply-side fight for adequate and profitable production. We explicitly characterize the conditions where each force dominates. Our focus is on understanding how capacity constraints and competition affect a firm's productmix decisions. We find that considering capacity constraints could significantly change traditional insights (that ignore capacity) related to product-line design and the role of competition therein. In particular, we show that when the resources are limited, the firm should offer only the product that has the highest margin per unit capacity. We find that this product could be the diametrically opposite product suggested by the existing literature. In addition, we show that for intermediate capacity levels, whereas the margin per unit capacity effect dominates in a less competitive market, proliferation and cannibalization effects dominate in a more competitive market.

Cooperative quality investment in outsourcing

“…Other related literature on this topic includes Rhee (1996), Villas-Boas (1998), Desai (2001, and others. More recently, Yayla-Küllü et al (2013) studied multiproduct quality competition with consideration of having a limited capacity. As a strategic issue, quality in these studies refers to both the design and conformance quality characteristics that are of interest to the customer when evaluating the product offered by the firm (see Garvin (1984) for an excellent summary of the quality definition).…”

Impact of national culture on airline operations

“…It is shown in literature that greater differentiation among services is a necessary factor for future success in vertically differentiated markets (Yayla-Kullu et al 2013). We find that an airline with future-oriented employees can understand and deliver taking this necessary factor into account.…”

Employees’ National Culture and Service Quality: An Integrative Review

“…Examples include airlines with business and economy classes, rental car services with luxury and compact cars, postal services with expedited and regular deliveries, and hotels with suites and standard accommodations. Although product differentiation has been widely discussed in both the marketing and operations literatures (e.g., Mussa and Rosen 1978;Moorthy 1984;Desai 2001;Netessine and Taylor 2007;Yayla-Küllü et al 2011, 2013, none of these works discusses the implications of culture across differentiated services.…”

“…The rich analytical literature on the product differentiation of multiproduct firms (e.g., Mussa and Rosen 1978;Moorthy 1984;Desai 2001;Yayla-Küllü et al 2011, 2013 suggests that if a firm wants to offer multiple products to different segments of the market successfully, increased levels of differentiation should exist between the products. Therefore, an evident difference between the service quality levels of high-and low-end market segments is a necessity for success.…”