A Model of Product Line Marketing

Abstract

Firms offer a variety of products to meet different customer needs. In many horizontally differentiated markets, prices are stable and firms make infrequent adjustments to their product lines. While prior research focuses on product line design, we investigate how firms should allocate their marketing effort when their product lines are fixed. We propose a simple model to analyze product line marketing. Our model exhibits a flagship-product effect in which the firm's optimal marketing effort is concentrated, provided that the ratio between consumer tastes dispersion and the convexity of the cost of marketing effort is below a threshold. The flagship product is selected according to a marketing effort allocation index that measures the trade-off between a product's markup and its potential market share. This result is robust with or without competition, and whether prices are exogenous or endogenous.

Firms often experience shocks to their marketing cost due to technological improvement or externalities. If a monopolist's cost of marketing effort declines, she should place more emphasis on a low-utility-high-markup product. Conversely, if the cost increases, the monopolist may find it beneficial to focus her marketing effort on a high-utility-low-markup product. When multi-product firms compete against each other, we show that if the opponent's cost of marketing effort decreases, there can be a spillover effect, in which the firm benefits from the opponent's cost reduction, thereby leading to a win-win situation.

Keywords: Marketing Effort Allocation, Product Line, Multi-Product Competition, Game Theory