An investigation of repositioning cost on product differentiation.

Abstract

Optimal product selection strategy and the effect of repositioning cost on product differentiation are investigated with the assumption of squential entry and finite repositioning cost. Consumers are assumed to be uniformly distributed in line and circle markets. Each consumer chooses a utility maximizing product and determines the amount according to a demand function. A firm enters a market sequentially in each period. Since the market potential is assumed to be a common knowledge, the number of entering firms is exogenously given. Price is assumed to be exogenously determined, and firms compete with positions only. A new entrant positions and all incumbents reposition simultaneously in each period subject to repositioning cost. Competition under the assumption of endogenous prices is also considered. We derive firms' demands and profits, which are functions of their positions. We obtain subgame-perfect equilibria and then address the issue of reactions to firms' position decisions within a game-theoretic perspective. We also determine the incumbent's (or entrant's) optimal defensive (or entry) strategy as well as the effect of repositioning cost on product differentiation. Evolution of the equilibrium state in each entry and the effect of repositioning cost on the evolution are systematically investigated in order to understand early entrant advantage. This work is expected to make a contribution to the research on product differentiation and competition in marketing. In addition to providing a theoretical framework for investigating firms' competitive behavior in a marketing context, the appropriate degree of product differentiation and the effect of repositioning cost on product differentiation are systematically investigated. Early entrant advantages and market evolution are also studied under more realistic marketing assumptions compared to traditional economic modeling. Further, this work provides product or brand managers with information to aid their defensive (or entry) and repositioning strategies under various conditions of repositioning cost.