Product Line Selection and Pricing with Modularity in Design

Authors:
Wallace J. Hopp;Xiaowei Xu
Affiliations:
Department of Industrial Engineering and Management Sciences, Northwestern University, Evanston, Illinois 60208;Department of Management Science and Information Systems, Rutgers University, The State University of New Jersey, Newark, New Jersey 07102
Venue:
Manufacturing & Service Operations Management
Year:
2005

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Abstract

This paper addresses the strategic impact of modular design on the optimal length and price of a differentiated product line. We represent consumer demand with a Bayesian logit model. We also break operations costs into product design and production components. Our analysis shows that reducing product development costs via modular design always makes it attractive to offer greater product variety. However, reducing production costs can sometimes motivate a reduction in variety for a risk-averse producer in a multiple-segment market. We also characterize the impacts of degree of modularity and production cost on price markup and market share. Finally, we show that the optimal product line length is monotonic in risk attitude and the monotonic weak majorization, partial order on product assortment.