Provision of Optional Versus Standard Product Features in Competition

Abstract

Competing brands differ in the extent to which they offer a feature as standard or optional in their product lines. In this paper, we study the competitive basis for this difference in brands’ product line strategies. Specifically, we analyze the relationship between a brand’s quality image and its propensity to offer a wider product line, starting from a relatively stripped-down base model to a more feature-rich model. We develop a conceptual framework and hypotheses by considering an analytical model with two vertically differentiated firms, and show that a low-quality firm would offer the feature as optional, i.e. offer a feature-added product as well as a stripped-down base product, if it chooses to add the feature to its product. On the other hand, a high-quality firm would offer the feature as a standard component unless the cost of the feature is high. We test this asymmetry in the propensity of high- and low-quality firms to offer optional and standard features with their product using data from the US passenger car market and find empirical support for our model.

Keywords: Product Line Strategy, Product Feature Design, Game Theory, Probit Model, Automobile Market

JEL Classification: M31, L13, C72, C11, C30