Decision Sciences Journal
Volume 30, Number 3
Summer 1999
Product Positioning and Pricing Under Production Cost Considerations
George C. Hadjinicola
Department of Public and Business Administration, School of Economics
and Management, University of Cyprus, Kallipoleos 75, P.O. Box
20537, CY 1678 Nicosia, Cyprus, email: bageorge@atlas.pba.ucy.ac.cy
ABSTRACT. A framework in a competitive environment
is proposed that incorporates production cost and economies of
scale in the problem of positioning a product for a market segment.
The model facilitates the existence of a Nash equilibrium in
prices and product positions. As such, firms can simultaneously
choose prices and product positions for the segment. This result
improves the traditional theory on equilibria points in prices
and product positions where firms choose their product positions
first and then set their prices. A sensitivity analysis demonstrates
the effects of changes in the unit savings derived from economies
of scale or the cost of furnishing a product with its attributes
by one firm on the product positions, prices, and profits of
all competing firms. More important, the paper examines the effect
on prices and profits of competing firms when one of the firms
repositions its product closer to the segment’s ideal point.
It is shown that under certain conditions, the profit of a firm
may actually decrease as it redesigns its product closer to the
segment’s ideal point. These conditions assist management
to identify the product design beyond which enhancements of the
product would lead to lower profits because of increasing production
costs. It is also shown that the price of this firm increases.
Past research supports the idea that positioning a brand closer
to the ideal point, given fixed product positions of competing
firms, would lead to greater buyer preferences and eventually
higher profits. The price and profits of the competing firm may
increase or decrease. Conditions are derived under which a movement
towards the segment’s ideal point by one firm would lead
to higher profits by the competing firm.
Subject Areas: Consumer Ideal Point, Economies of Scale,
Marketing-Production Interface, Market Segment, Market Share
Models, Nash Equilibrium, Product Attribute Space, and Product
Positioning. |