Two-dimensional product differentiation and pricing strategies

SHANGGUAN Lili, MIAO Zhaowei, LAN Yongquan

Systems Engineering - Theory & Practice ›› 2021, Vol. 41 ›› Issue (1) : 93-112.

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Systems Engineering - Theory & Practice ›› 2021, Vol. 41 ›› Issue (1) : 93-112. DOI: 10.12011/SETP2020-0733

Two-dimensional product differentiation and pricing strategies

  • SHANGGUAN Lili, MIAO Zhaowei, LAN Yongquan
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Abstract

This paper studies a manufacturer's two-dimensional product differentiation and pricing strategies when selling products in different channels. On the basis of the horizontal and vertical dimensions, we consider three possible product differentiation strategies. We find that the optimal pricing strategies in the cases of horizontal and vertical differentiation are uniform pricing and differentiated pricing, respectively. The comparisons among differentiation strategies suggest that when only single-dimensional differentiation (i.e., one horizontal differentiation or one vertical differentiation) is available, product indifference strategy can be the optimal strategy for the manufacturer under some conditions. Specifically, under the condition that only the horizontal differentiation strategy is available, when product indifference strategy is optimal, the manufacturer optimally chooses to produce high-quality products; however, in the case that only the vertical differentiation strategy is available, he chooses to produce only low-quality products. When both horizontal and vertical differentiation are available, with the increase of production cost, the horizontal differentiation gradually dominates the vertical differentiation; however, as long as the level of horizontal differentiation is high enough, regardless of the cost, the horizontal differentiation is always optimal for the manufacturer. Besides, we extend the situation of adopting horizontal and vertical differentiation strategy simultaneously.

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differentiation strategy / pricing strategy / product horizontal design / vertical quality level

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SHANGGUAN Lili , MIAO Zhaowei , LAN Yongquan. Two-dimensional product differentiation and pricing strategies. Systems Engineering - Theory & Practice, 2021, 41(1): 93-112 https://doi.org/10.12011/SETP2020-0733

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Funding

National Natural Science Foundation of China (71671151, 71371158, 71711530046); The Humanities and Social Sciences Foundation of Ministry of Education of China (14YJC630057)
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