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||2006년 05월 02일
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The current paper considers the issue of commonality in a multi-attribute setting and develops a model that addresses the tradeoff relationship associated with the use of commonality. In the modeling, we assume that among multiple attributes, there i ...
The current paper considers the issue of commonality in a multi-attribute setting and develops a model that addresses the tradeoff relationship associated with the use of commonality. In the modeling, we assume that among multiple attributes, there is a subset of attributes for which the firm plans to offer as common. We refer to those attributes as common attributes and the rest of attributes as custom attributes. By considering multiple attributes, we are able to infer the implication of having attributes with different characteristics common or not in the product line design. Using this modeling framework, we derive a specification of optimal product line design and analytic insights on product line design using commonality. We also examine questions such as how the commonality affects the implementability of FBS and when the use of commonality benefits market participants--the firm and consumers.
Our results show that the FBS is implementable when a product line is designed with multiple custom and common attributes. The implementability condition for FBS is characterized by the four factors: each segment’s overall inclination for a bundle of attributes, part worth difference across custom attributes between segments, part worth difference across common attributes between segments, and the difference in relative size of segments. When both segments’ overall inclination and relative sizes are the same, then FBS is always implementable, regardless of part worth structure across individual attributes. However, if that is not the case, then the four factors interplay with each other in determining the implementability of FBS. In specific, common attributes per se are a burden in implementing FBS because they limit the firm’s ability to differentiate products. However the cost savings that are brought by the common attributes alter the firm’s cost structure so that they make it affordable for the firm to offer the attributes at higher levels if it is desirable in implementing the FBS, which means greater possibility of achieving a favorable product line. Therefore, the use of common attributes can affect the implementability of FBS in negative and positive ways, and under certain conditions, judicious use of commonality makes FBS implementable when it is not without commonality. We provide concise conditions for the FBS and all these observations.
Our results also show that the use of common attributes can benefit consumers as well as the firm in certain conditions. This happens because the notion of commonality limits the firm’s ability to extract the consumer surplus. Therefore when the firm decides to take the benefits of cost saving at the expense of product indifferentiability, consumers can also benefit in terms of increased surplus under certain conditions. In other words, there are conditions where the increased amount of social welfare brought by the notion of commonality can be allocated between the firm and consumers. In summary, our results add to existing knowledge that the use of commonality with associated cost savings can affects the existence of FBS, and that it can benefit not only the firm but also consumers by limiting the monopolist’s ability to extract consumer surplus.
Research result report
Use of commonality or common features among products in a line is a popular design practice and examples of this can be found in many product categories ranging from automobiles to service goods to household appliances. We present an analytic model o ...
Use of commonality or common features among products in a line is a popular design practice and examples of this can be found in many product categories ranging from automobiles to service goods to household appliances. We present an analytic model of product line design with multiple custom and common attributes that addresses the tradeoff relationship associated with commonality: cost saving versus product differentiability. By considering multiple attributes, we are able to infer the implication of having attributes with different characteristics common or not in the product line design. From the model, we derive the specifications of optimal product line design, and show how the commonality affects the implementability of first best solution and how the commonality benefits the firm and consumers simultaneously.
Product Line Design, Commonality, Modeling, Surplus, First Best Solution
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