Product Line Design: Effects of Mixed-Type Consumers

Most previous studies classify consumers into high-type and low-type. High-type consumers have a high valuation for quality and tend to buy high-quality products while low-type consumers have a low valuation for quality and tend to buy low-quality products. Besides both types of consumers, there may exist some consumers who have an indefinite quality valuation and may choose between high-quality and low-quality products. We call these consumers as mixed-type consumers. However, previous studies rarely discuss the effects of mixed-type consumers. Therefore, in this thesis, we first propose a stylized model to explore the effects of mixed-type consumers by comparing the model without mixed-type consumers (2-type model) to the model with mixed-type consumers (3-type model). The results show that the optimal profit in the 2-type model increases with the difference between amounts of high-type and low-type consumers, but is independent of quality valuations. The optimal profit in the 3-type model depends on the difference between amounts of high-type and low-type consumers, and the difference between quality valuations of both types of consumers. However, the optimal profit in the 3-type model does not always increase with the difference between amounts of high-type and low-type consumers. It may decrease with the difference in some condition. We further investigate the effects of mixed-type consumers by considering the market coverage of each segment and self-selection constraints. The regions satisfied the self-selection constraints can be classified into three categories. Interestingly, the category of satisfied regions depends on the coverage of high-type and low-type segments, but is independent of the coverage of mixed-type segment. However, the amount of mixed-type consumers can be used to separate the satisfied regions for the models in the same category. Furthermore, the optimal profit in the model with fewer fully-covered segments is greater than that in the model with more except the model with three types of segments being fully covered. Our analytical results can provide some valuable insights of product line design and help firms formulate effective strategies for different market circumstances.