Abstract
One of the most important decisions a firm must make is the style and qualities that its product will possess. Up to this point, we have taken product or brand characteristics as given. The main reason for this is that it can take a considerable amount of time to come up with something innovative, such as a new style of automobile or a more powerful laundry detergent. Nevertheless, when developing a new car a firm must answer a number of design questions—should the company produce an economy or a sports car, should the body style be traditional or cutting-edge, should it have a front-wheel, rear-wheel, or all-wheel drive train.
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Notes
- 1.
Normally, the firm would choose z before making an output decision. For simplicity, we assume a static setting.
- 2.
The second derivatives of the profit equation are π qq = −2b, π qz = π zq = d, and π zz = −2e. With this notation, π hk ≡ ∂2 π/∂h∂k for all h and k equal to q and z. For example, π qq ≡ ∂2 π/∂q 2 and π qz ≡ ∂2 π/∂q∂z. Thus, the second-order conditions of profit maximization are met when 4be > d 2, a condition that must hold for the profit-maximizing level of output and quality to be positive. See the Mathematics and Econometrics Appendix at the end of the book for further discussion of second-order conditions.
- 3.
When we normalize c to 0, we can interpret the Nash price as the markup of price over marginal cost.
- 4.
That is, ∂q */∂e = ∂p */∂e = −(2ad 2)/(4e − d 2)2 < 0 and ∂π */∂e = −(a 2 d 2)/(4e − d 2)2 < 0.
- 5.
The choice of which firm goes first is irrelevant, as we could have easily let firm 2 move in the first period.
- 6.
Of course, delaying entry may be costly as well. Thus, if the cost of delay is sufficiently lower for firm 2, then firm 1 will be forced to enter first.
- 7.
- 8.
This condition holds for linear demand and cost equations. To illustrate, consider the following inverse demand and total cost functions: p = 12 − q + z and TC = cq − z 2, where c = 0 for simplicity. In this case, p * = q * = 6 + z/2; TS = 54 + 6z − 7z 2/8, which is strictly concave, with TS reaching a maximum at z = 3.43.
- 9.
This derivative involves the use of the chain rule, which is discussed in the Mathematics and Econometrics Appendix at the end of the book. According to the chain rule, if y = f(x 1) and x 1 = f(x 2), then a change in x 2 causes a change in x 1 which causes y to change. That is, dy/dx 2 = (dy/dx 1)(dx 1/dx 2). In this case, because CS = CS(p) and p = p(z), ∂CS/∂z = (∂CS/∂p)(∂p/∂z).
- 10.
In addition, consumers also have unit demands, choosing to buy only a single unit of a brand. A consumer purchases the brand that generates the highest utility, assuming utility is positive. If utility is negative, no purchase is made.
- 11.
This assumes that all consumers are willing to make a purchase when this store location is chosen. If there is an increase in transportation costs, however, then the angle at the top of the triangle in Fig. 13.4 becomes sharper. In this case, the firm serves only customers who are nearby and demand is not diminished by moving slightly left or right from the middle of town.
- 12.
Johnson and Myatt point out that this terminology applies to any marketing change. For example, a particular advertising campaign may appeal to the masses or to a niche group of consumers, an issue we take up when we discuss advertising.
- 13.
Where this equilibrium occurs will depend on demand conditions, cost conditions, and the toughness of competition (i.e., cartel, Cournot, or Bertrand).
- 14.
Of course, if Bud Light, Eveready batteries, and General Electric electronic equipment were of inferior quality, this would harm each company’s overall reputation. Thus, they each have an incentive to offer quality goods, something consumers would anticipate.
- 15.
This strategy is also discussed in McAfee (2002, 135–136).
- 16.
- 17.
Silberberg (1985) finds that consumer demand for variety appears to be a normal good. Rising income need not imply multiproduct production, as it may simply induce entry of a greater number of single product producers of differentiated goods.
- 18.
That is, a 1% increase in the price of brand j has no effect on the demand for brand i.
- 19.
At this time, most brewers marketed a single brand of beer. Anheuser-Busch was the first brewer to segment the market with a subpremium brand (Busch), a premium brand (Budweiser), and a superpremium brand (Michelob). For further discussion of Anheuser-Busch’s tactics, see V. Tremblay and C. Tremblay (2005).
- 20.
Firms are assumed to have a single production facility. Bulow et al. (1985) assumed that it was too costly for firms to set up multiple plants.
- 21.
- 22.
For a critical review of this decision, see Scherer and Ross (1990, 465–466).
- 23.
This is especially true for new brands, as the marketing literature indicates that advertising expenditures for a new brand are typically over four times that of an existing brand (Kolter and Armstrong 1998).
- 24.
This ignores the effect that entry may have on price competition. If competition were to increase, producer surplus would fall and total surplus would rise.
- 25.
In contrast, Gilbert and Matutes (1993) show that it is more likely in horizontally differentiated markets.
- 26.
These numbers only include brands of beer and exclude other products produced by these companies, such as maltalternatives (e.g., Zima), energy drinks, and bottled water.
- 27.
This was based on a car’s driving pleasure, ability to thrill, styling beauty, and ability to impress others (http://www.caranddriver.com, accessed 5 October 2009).
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Tremblay, V.J., Tremblay, C.H. (2012). Product Design, Multiproduct Production, and Brand Proliferation. In: New Perspectives on Industrial Organization. Springer Texts in Business and Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-3241-8_13
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