International Transactions in Operational Research

Balancing product differentiation and cost saving in the presence of consumer deliberation

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Abstract This paper investigates the manufacturer's optimal product line design under different production strategies when customers with different preference structures (dominating or nondominating) need to incur the deliberation cost to uncover customers' valuations of product quality. We characterize the optimal price, quality, and profit under different production strategies and preference structures. Our results demonstrate that the optimal product line under both production strategies is threshold‐controlled, and there exists a deliberation cost threshold, below which the manufacturer provides efficient quality for high‐valuation customers and distorts the quality of low‐end products, while above such a threshold, the manufacturer increases the quality dispersion between high‐end and low‐end products. We also find that the adoption of commonality will increase the manufacturer's profit only if the cost‐saving effect is relatively significant. Contrary to the existing literature, we finally reveal that commonality can reduce cannibalization in the nondominating preference structure scenario if the deliberation cost is low and the cost‐saving effect is strong or if the deliberation cost is sufficiently high.

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