A Joint Marketing/operations Model of Differentiated Product Decisions

Decisions concerning product differentiation lie at the interface of marketing and operations management. This paper addresses the influence of consumer preferences and operations costs on the optimal number and price of variants of a differentiated product. We represent consumer preferences with the logit model and market segments with a Bayesian model. We also break operations costs into overhead costs and ongoing production/supply chain costs. Our analysis shows that reducing operations costs generally makes it attractive to offer greater product variety. But this is not always true if a producer is risk-averse. We demonstrate that product variety depends heavily on the overhead cost, which is mainly determined by a supply chain structure and the flexibility of a manufacturing system. We also show that operations costs and market structure have a significant impact on the pricing strategy. Date: 08/19/03. Email: [email protected] and [email protected].