Modeling Joint Pricing and Product Assortment Choices

Research both in marketing and economics so far has treated product attributes as exogenous when estimating demand and supply models. While this assumption may be justified in the short run, in the long run managers make product-positioning decisions by taking into account the demand they face relative to the competitive landscape. In this paper, we take a first step toward exploring the positioning strategies of oligopolistic firms by treating product choice as endogenous. Firms compete by choosing which products to offer and then setting prices. We use the framework developed in Seim (2004) to model firms’ positioning decisions as a game of imperfect information where competitors have cost advantages to offering certain product types. We assume such cost advantages to be unobserved by the firm’s rivals in the market at the time at which positioning decisions are made. In the resulting Bayesian Nash equilibrium, firms sort into product offerings that allow them to target demand optimally while limiting competitive intensity.