Consumer Deliberation and Product Line Design

Abstract

This paper studies optimal product line design when consumers need to incur costly deliberation to uncover their valuation for quality. To induce deliberation, the firm must maintain quality dispersion and cut the price of the high-end product, so that consumers are motivated to deliberate in the hope that high-end consumption fits their needs. To prevent deliberation, the firm may have to offer downgraded quality at a low price, so that an impulsive purchase will not appear too wasteful. Whether the firm should induce deliberation depends on how much surplus it creates by aligning the supply of quality with heterogeneous demand for quality, and how much surplus it captures during this process. Interestingly, equilibrium firm profit, consumer surplus, and social welfare can all increase with the cost of deliberation. We extend the model to accommodate consumers' heterogeneous prior beliefs of their valuation for quality. We also discuss how market research could benefit from taking into account the endogeneity of consumer deliberation.

Keywords: consumer deliberation, product line design, price discrimination, information acquisition, agency theory, preference construction

JEL Classification: L11, L15, M12, M31