MANAGERIAL ECONOMICS

REPORT ON:

PRODUCT LINE PRICING

Product Line Pricing

PREPAIRED BY
Name MADHUSUDAN B. HANWAT VIDULA PARADKAR SUMIT KADAM VAM VARMA SATYAVAN RAUNDHAL BABURAO BADHE KOMAL S. KATKADE MANGESH J. PATIL MANOJ JADHAV SUJEET KOTHAWADE KANAIYA BAROT Course MMM MHRDM MFM MMM MMM MMM MHRDM MHRDM MFM MFM MMM Roll No M091056 H091030 F091019 M091043 M091051 M091050 H091009 H091014 F091015 F091023 M091006

Prepared for MS.Joshi INSTITUTE MANAGEMENT & COMPUTER STUDIES, THANE

Product Line Pricing

A PROJECT REPORT ON By
Name MADHUSUDAN B. HANWAT VIDULA PARADKAR SUMIT KADAM VAM VARMA SATYAVAN RAUNDHAL BABURAO BADHE KOMAL S. KATKADE MANGESH J. PATIL MANOJ JADHAV SUJEET KOTHAWADE KANAIYA BAROT

(PRODUCT LINE PRICING)

Course MMM MHRDM MFM MMM MMM MMM MHRDM MHRDM MFM MFM MMM

Roll No M091056 H091030 F091019 M091043 M091051 M091050 H091009 H091014 F091015 F091023 M091006

Approved by Ms. Joshi, Professor

A Project Report submitted in partial fulfillment Of the requirements of

THE MMS PROGRAM (CLASS 2010) INSTITUTE OF MANAGEMENT AND COMPUTER STUDIES

Product Line Pricing

ACKNOWLEDGEMENT
We take this opportunity of submitting this dissertation to express our deep gratitude to all those who offered their valuable help and time without which this project would not have progressed. The success of starting this project lies solely on the kind assistance and encouragement of all those people. We are greatly indebted to our guide Prof. Ms. Joshi for giving us the opportunity to work on this project in spite our inexperience and providing us with valuable insights and much needed encouragement from time to time.

Product Line Pricing

CERTIFICATE

This is to certify that the said project is undertaken under my guidance as a part of curriculum activity and a part of the subject. Further to certify that the said project is completed and submitted to me in prescribed time limit and project is properly handled by the team

_________________ Sign. Of Guide (M.S. Joshi) Date :- 08.03.2010 Place :- Thane

____________________ IMCOST, Principle

Product Line Pricing

Table of Contents 1. 2. 3. 4. 5. 6. INTRODUCTION ................................................................................7 PRODUCT -LINE PRICING..................................................................9 PRODUCT LINE PRICING STRATEGY ..............................................10 ALTERNATIVE POLICIES OF PRICE RELATIONSHIP.......................12 WHEN TO USE PRODUCT LINE PRICING STRATEGY ......................13 DEMAND RELATIONSHIP IN PRODUCT LINE .................................16

7. RETAIL PRODUCT -LINE PRICING STRATEGY WHEN COSTS AND PRODUCTS CHANGE..............................................................................17 8. 9. 10. 11. CASE STUDY....................................................................................20 THE MODEL .....................................................................................22 DISCRIMINATION IN THE EUROPEAN CAR MARKET...................26 CONCLUSIONS .............................................................................29

Product Line Pricing

1. INTRODUCTION P r o d u c t l i n i n g i s t h e marketing s t r a t e g y o f o f f e r i n g f o r s a l e s e v e r a l related products.Unlike product bundling, where several products are combined into one, lining involves offering several related products individually. A line can compri se related products of various sizes, types, colors, qualities, or prices. Line depth refers to the number of product variants in a line. Line consistency refers to how closely related the products that make up the line are. Line vulnerability refers to th e percentage of sales or profits that are derived from only a few products in the line. The number of different product lines sold by a company is referred to as width of product mix. The total number of products sold in all lines is referred to as length of product mix. If a line of products is sold with the same brand name, this is referred to as family branding. When you add a new product to a line, it is referred to as a line extension. When you add a line extension that is of better quality than the other products in the line, this is referred to as trading up o r brand leveraging. When you add a line extension that is of lower quality than the other products of the line, this is referred to as trading down. When you trade down, you will likely reduce your brand equity. Y o u a r e gaining short- term sales at the expense of long term sales. Image anchors are highly promoted products within a line that define the image of the whole line. Image anchors are usually from the higher end of the line's range. When you add a new product within the current range of an incomplete line, this is referred to as line filling. Price lining is the use of a limited number of prices for all your product offerings. This is a tradition started in the old five and dime stores in which everything cost either 5 or 10 cents. Its underlying rationale is that these amounts are seen as suitable price points for a whole range of products by prospective customers. It has the advantage of ease of administering, but the disadvantage of inflexibility, particularly in times of inflation or unstable prices.

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There are many important decisions about product and service development and marketing. In the process of product development and marketing we should focus on strategic decisions about product attributes, product branding, product packaging, product labeling and product support services . But product strategy also calls for building a product line.

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2. PRODUCT-LINE PRICING

Product line pricing is also becoming an increasingly common feature of many markets, particularly manufactured products where there are many closely connected complementary products that consumers may be enticed to buy. It is frequently observed that a producer may manufacture many related products. They may choose to charge one low price for the core product (accepting a lower mark-up or profit on cost) as a means of attracting customers to the components / accessories that have a much higher mark-up or profit margin. Establishing a single price for all products in a product line, such as having a price of $55 for the high-priced line of dress shirts, $45 for the medium-priced line, and $35 for the lower priced line. Product line pricing factors in the impact of a product's price on demand for another product offered by that marketer. For example, if McDonald's offered a $12 sandwich, it would be far out of the price/value range established by other sandwiches in McDonald's product line and demand would be minimal. The price of a complementary product such as software can directly impact demand for the hardware. The higher the price of the software, the lower the demand for the hardware. McDonald's could afford to offer a beverage at cost if the incremental sandwich sales revenue gained as a result outweighed the lost beverage revenue. The price of a product such as a compact car can impact demand for another compact car model that would serve as a substitute. The higher the price of one car, the greater the demand for the other. Variations in manufacturing costs across products are also a factor in Product line pricing.

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3. PRODUCT LINE PRICING STRATEGY You can only use a product line pricing strategy if you have a whole product line or if you are in the process of building a whole p r o d u c t l i n e ( m o r e t h a n o n e p r o d u c t , a n d u s u a l l y m or e th a n s e ve r a l p r o d u c t s ) . T h i s statement seems self - e v i d e n t b u t r e m em ber p r o d u c t s a r e n o t u s u a l l y b r o u g h t o u t i n a f u l l l i n e ; t h e y a r e i n t r oduced one at a time. So, to use a product line pricing strategy you will need to keep track of each product's life cycl e stage, how inter -dependent the products are, when you estimate a product will leave the line, when a new product is scheduled to enter the line, and how the products in the line complement each other. All of these product l i n e e l e m e n t s w i l l a f f e c t y o u r pr o d u c t l i n e p r i c i n g s t r a t e g y . O n e w a y o f l o o k i n g a t p r i c i n g f o r a p r o d u c t l i n e i s t o c o n sider p r i c i n g a n d p r o f i t a b i l i t y o f t h e w h o l e l i n e , n o t o n l y i n d i vidual products of the line. In this type of price analysis, you might have s o m e p r o d u c t s t h a t l o s e m o n ey but they help pull in buyers for those products that make money (preferably that make a lot of m o n e y ) . O t h e r p r o d u c t s i n t h e l i n e m i g h t j u s t b r e a k- even but they c o n t r i b u t e t o t h e f u l l n e s s o f t h e l i n e a n d h e l p s u p p o r t t h e m o n e ymaking products. T h e o t h e r w a y t o l o o k a t p r o d u c t l i n e p r i c i n g i s t o a n a l y z e t h e imp o r t a n c e o f o n e o r m o r e p r o d u c t s t o t h e w h o l e l i n e . F o r ex ample, for a car dealership, the car model is the product, and the accessories, extended warranties, service package, color, sunroof and other o p t i o n s a r e t h e r e s t o f t h e l i n e i t e m s . T h o s e l i n e i t e m s w o u l d b e r a t h e r m e a n i n g l e s s , f o r t h e m o s t p a r t , w i thout the car as the primary product.

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P r o d u c t l i n e p r i c i n g s t r a t e g i e s c a n b e f u r t h e r c o m p l i c a t e d b y c o mpetitive activity by product, not exclusi vely by line. If you have five competi tors for one of your products in the line, and then only two competitors for the other products in the line, you might u s e a d i f f e r e n t p r i c e s t r a t e g y f o r t h e p r o d u c t w i t h l o t s o f c o m p e tit i o n , t h a n t h e o t h e r l i n e p r o d u c ts. S o m e m o r e s p e c i f i c p r o d u c t l i n e p r i c e s t r a t e g i e s a r e o p tional feature pricing (such as in the car example above); anci llary product pricing (such as a digital camera that is packaged with a lens, a case, a battery charger, a memory card, etc.); two -par t p r i c i n g u c h a s a m u s e u m t h a t c h a r g e s f o r g e n e r a l en trance and t h e n a d d s a n a d d i t i o n a l c h a r g e f o r e n t r a n c e t o a s p e c i a l exhibit); p r o d u c t b u n d l i n g p r i c i n g ( i n t h e a b o v e c a r e x ample, if you buy the c a r a n d t h e a c c e s s o r i e s o r o n e o f t h e o t h e r o p t i o n s a t t h e same time you will receive a better price than if you buy some of the accessories separately or later). M a k e s u r e t o b u i l d a s t r o n g p r o m o t i o n a l p r o g r a m f o r p r o du c t l i n e p r i c i n g ; b u y e r s n e e d t o c l e a r l y u n d e r s t a n d w h a t t h e y a r e b u ying, what the differences are within the line (especially if there is not c l e a r d i f f e r e n t i a t i o n ) , a n d t h e b e n e f i t s o f b u y i n g b u n d l e s , op tional features or other line accessories at the same time as the primary p r o d u c t . Y o u r b u y e r s w i l l a l s o n e e d t o u nd e r s t a n d t h e p r i c i n g a n d value differences between the products and within the line.

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4. Alternative policies of price relationship A l o g i c a l a p p r o a c h t o p r o d u c t l i n e p r i c i n g i s t o s t a r t w i t h a p i c ture o f t h e a l t e r a n a t i v e k i n d s o f p o l i c y r e g a r d i n g t h e r e l a t i o nships a m o n g p r i c e s o f m e m b e r s o f p r o d u c t l i n e . T h i s a p p r o a c h as sumes t h a t i t i s d e s i r a b l e t o h a v e s o m e k i n d o f u n d e r l y i n g s y s t e m o f rel a t i o n s h i p o f p r o d u c t p r i c e s w h i c h i s d e b a t a b l e . B u t b e f o r e a d o p ti n g a p h i l o s o p h y o f c h a o s i t i s w e l l t o e x a m i n e s y s t e m a t i c p att e r n s , s e v e r a l o f which are sketched below. 1] Prices that are proportional to full cost, i.e., that produce the s a m e p e r c e n t a g e n e t p r o f i t m a r g i n f o r a l l p r o d uct. 2 ] P r i c e s t h a t a r e p r o p o r t i o n a l t o i n c r e m e n t a l c o s t , i . e . , t h a t p rod u c e s t h e s a m e p e r c e n t a g e c o n t r i b u t i o n- mar gin over incr emental c o s t f o r a l l p r od u c t s . 3 ] P r i c e s w i t h p r o f i t m a r g i n s t h a t a r e p r o p o r t i o n a l to conversion cost, i.e., that take no account of purchase materials cost. 4] Prices that produce contribution margins that depend upon the e l a s t i c i t y o f d e m a n d o f d i f f e r e n t m a r k e t s egm e n t . 5] Prices that are systematically related to the stage of market a n d c o m p e t i t i v e d e v e l o p m e n t o f i n d i v i d u a l m e m b e r s o f t h e p r o duct line.

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5. WHEN TO USE PRODUCT LINE PRICING STRATEGY Let me state the obvious: you can only use a product line pricing strategy if you have a whole product line or if you are in the p r o c e s s o f b u i l d i n g a w h o l e p r o d u c t l i n e ( m o r e t h a n o n e p r o d uct, and usually more than several products). This statement seems s e l f- e v i d e n t b u t r e m e m b e r p r o du c t s a r e n o t u s u a l l y b r o u g h t o u t i n a full line; they are introduced one at a time. So, to use a product line pricing strategy you will need to keep track of each product's life cycle stage, how inter -dependent the p r o d u c t s a r e , w h e n y o u e s t i m a t e a p r o d u c t will leave the line, when a new product is scheduled to enter the line, and how the products in the line complement each other. All of these product line elements will affect your product line pricing strategy. O n e w a y o f l o o k i n g a t p r i c i n g f o r a p r o d u ct l i n e i s t o c o n sider p r i c i n g a n d p r o f i t a b i l i t y o f t h e w h o l e l i n e , n o t o n l y i n d i vidual products of the line. In this type of price analysis, you might have some products that lose money but they help pull in buyers for t h o s e p r o d u c t s t h a t m a k e m o n e y ( p r e f er a b l y t h a t m a k e a l o t o f m o n e y ) . O t h e r p r o d u c t s i n t h e l i n e m i g h t j u s t b r e a k- even but they c o n t r i b u t e t o t h e f u l l n e s s o f t h e l i n e a n d h e l p s u p p o r t t h e m o n e ymaking products. T h e o t h e r w a y t o l o o k a t p r o d u c t l i n e p r i c i n g i s t o a n a l y z e t h e imp o r t a n c e o f o n e o r m o r e p r o d u c t s t o t h e w h o l e l i n e . F o r ex ample, for a car dealership, the car model is the product, and the accessories, extended warranties, service package, color, sunroof and other options are the rest of the line items. Those line items w o u l d b e r a t h e r m e a n i n g l e s s , f o r t h e m o s t p a r t , w i thout the car as the primary product. P r o d u c t l i n e p r i c i n g s t r a t e g i e s c a n b e f u r t h e r c o m p l i c a t e d b y c o mpetitive activity by product, not exclusively by line. If you have f i v e c o m p e t i t o r s f o r o n e o f y o u r p r o d u c t s i n t h e line, and then only two competitors for the other products in the line, you

might use a different price strategy for the product with lots of competition, than the other line products.

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S o m e m o r e s p e c i f i c p r o d u c t l i n e p r i c e s t r a t e g i e s a r e o p tional f e a t ure pricing (such as in the car example above); anci llary product pricing (such as a digital camera that is packaged with a lens, a case, a battery charger, a memory card, etc.); two -part p r i c i n g ( s u c h a s a m u s e u m t h a t c h a r g e s f o r g e n e r a l en trance and t h e n a d d s a n a d d i t i o n a l c h a r g e f o r e n t r a n c e t o a s p e c i a l exhibit); p r o d u c t b u n d l i n g p r i c i n g ( i n t h e a b o v e c a r e x ample, if you buy the car and the accessories or one of the other options at the same t i m e y o u w i l l r e c e i v e a b e t t e r p r i c e t h a n i f y o u b u y s o m e o f the accessories separately or later). M a k e s u r e t o b u i l d a s t r o n g p r o m o t i o n a l p r o g r a m f o r p r o du c t l i n e p r i c i n g ; b u y e r s n e e d t o c l e a r l y u n d e r s t a n d w h a t t h e y a r e b u ying, what the differences are within the line (especially if there is not clear differentiati o n ) , a n d t h e b e n e f i t s o f b u y i n g b u n d l e s , op tional features or other line accessories at the same time as the primary p r o d u c t . Y o u r b u y e r s w i l l a l s o n e e d t o u nd e r s t a n d t h e p r i c i n g a n d value differences between the products and within the line. Let me state the obvious: you can only use a product line pricing strategy if you have a whole product line or if you are in the p r o c e s s o f b u i l d i n g a w h o l e p r o d u c t l i n e ( m o r e t h a n o n e p r o d uct, and usually more than several products). This statement seems s e l f- e v i d e n t b u t r e m e m b e r p r o d u c t s a r e n o t u s u a l l y b r o u g h t o u t i n a full line; they are introduced one at a time. So, to use a product line pricing strategy you will need to keep track of each product's life cycle stage, how inter -dependent the p r o d u c t s a r e , w h e n y o u estimate a product will leave the line, when a new product is scheduled to enter the line, and how the products in the line complement each other. All of these product line elements will affect your product line pricing strategy.

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O n e w a y o f lo o k i n g a t p r i c i n g f o r a p r o d u c t l i n e i s t o c o n sider p r i c i n g a n d p r o f i t a b i l i t y o f t h e w h o l e l i n e , n o t o n l y i n d i vidual products of the line. In this type of price analysis, you might have some products that lose money but they help pull in buyers for t h o s e pr o d u c t s t h a t m a k e m o n e y ( p r e f e r a b l y t h a t m a k e a l o t o f m o n e y ) . O t h e r p r o d u c t s i n t h e l i n e m i g h t j u s t b r e a k- even but they c o n t r i b u t e t o t h e f u l l n e s s o f t h e l i n e a n d h e l p s u p p o r t t h e m o n e ymaking products. T h e o t h e r w a y t o l o o k a t p r o d u c t l i n e p r i c i n g i s t o a n a l y z e t h e imp o r t a n c e o f o n e o r m o r e p r o d u c t s t o t h e w h o l e l i n e . F o r ex ample, for a car dealership, the car model is the product, and the accessories, extended warranties, service package, color, sunroof and other options are the rest of the line items. Those line items w o u l d b e r a t h e r m e a n i n g l e s s , f o r t h e m o s t p a r t , w i thout the car as the primary product.

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6. DEMAND RELATIONSHIP IN PRODUCT LINE

T w o d e m a n d c h a r a c t e r i s t i c p e c u l i a r t o m u l t i p l e- product lines are significant for prici n g p u r p o s e . T h e f i r s t i s t h e i n t e r d ep e n d e n t o f t h e d e m a n d f o r v a r i o u s p r o d u c t o f m e m b e r s line. Interdepen de n c e t a k e s many form. Products may be substitutes for each other, e.g., different models of radios or grades of tires. They m a y b e c o m p l em e n t a r y , e . g. , t a b u l a t o r s a n d p u n c h e d c a r d s . They may be complementary in the more remote and subtle sense of a u g m e n t i n g o n e a n o t h e r s e . g . , i n e n h a n c i n g t h e r e p u t ation of the firm. Interdependence also has a time dimension. The sales of one product today may affect the sales of another product tomorrow. S t r i k i n g e x a m p l e s a r e i n t r o d u c t o r y m o d e l s , s u c h t r i a l s u b s c r i ptions a n d c h i l d r e n s e d i t i o n s o f m a g a zi n e s , d i m i n u t i v e s p o r t i n g equi pments . But this time as p e c t e x t e n d s i n t o a n y p r o d u c t g r o u p i n w h i c h t h e s a l e s o f o n e product tends to tie the customer to future purchase of another product as exemplified by the slow -speed phonographs and their records. A s e c o n d d e m a n d c h a r a c t e r i s t i c i n m u l t i p l e-p r o d u c t l i n e s i s t h e i r i m p o r t a n c e a s i n s t r u m e n t s f o r m a r k e t s egm e n t a t i o n s a nd price d i s c r i m i n a t i o n s . T h e y p r o v i d e o p p o r t u n i t i e s f o r b r e a k i n g t h e m arket into smaller sector that differ in price elasticity and hence can profitably be charged different prices. Product design and pricing a n d m a j o r m e t h o d s f o r a c h i e v i n g s e g m e n t a t i o n . No t o n l y c a n m ark e t s e g m e n t a t i o n i n c r e a s e p r o f i t s b y s e t t i n g p r i c e s t h a t t a k e adv a n t a g e o f t h e d i f f e r e n t e l a s t i c i t y o f d e m a n d i n e a c h s e c tor; it can also increase total sales by penetrating mass markets at prices that cover incremental costs and contribute a little to over -head.

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7. Retail Product-Line Pricing Strategy When Costs and Products Change Technological advances and other factors are rapidly changing the n a t u r e o f p r o d u c t s a n d c o s t s t r u c t u r e s . S u c h f a c t o r s c a n impact p r o d u c t i n g r e d i e n t s a n d c o s t c o m p o n e n t s , h a v i n g a s u d d e n d r am a t i c i m p a c t o n t h e w h o l e s a l e a n d r e t a i l p r i c e s o f m a n y v a r i ants within product lines such as computers, printers, digital cameras, cellular phones and kitchen electrics. Decreases in computer chip p r i c e s , f o r e x a m p l e , a f f e c t t h e p r i c e s o f m a n y p r o d u c t s f r o m c e l l ul a r p h o n e s t o a l a r m c l o c k s ; i n c r e a s e s i n w a g e s i m p a c t m o s t s e rv i c e s f r o m h e a l t h c a r e t o b a n k i n g ; a n d , o i l p r i c e s h o c k s d r a m a tic a l l y i m p a c t m a n y p r o d u c t s f r o m a u t o m ob i l e s t o h o m e i n s u l a t i o n . T h e s e r a p i d c h a n g e s c a n al so lead to abrupt additions or deletions from a product line. However, cost changes can have a disproportionate impact on only one end of the line (e.g., higher or lower quality variants) because quality differences are often caused by differences in com p o n e n t s o r i n g r e d i e n t s . F o r e x a m p l e , i n c r e a s e s i n t h e p r i c e o f diamonds might have a disproportionate impact on the higher quality variants of the jewelry lines (e.g., watches, earrings, n e c klaces, and bracelets) because, for such variants, a greater p e r c en t a g e o f t h e c o s t c o m e s f r o m d i a m o n d s . L o w e r q u a l i t y j ewe l r y v a r i a n t s m a y c o n t a i n f e w o r n o d i a m o n d s . S i m i l a r l y , d ecreases in the prices of nickel cadmium batteries may have more impact on lower quality electronic devices (e.g., camcorders, CD p l a y e r s , c o rd l e s s t e l e p h o n e s , a n d h o m e l a p t o p c o m p u t e r s ) b ecause higher quality devices use other types of batteries (e.g., manganese lithium). In yet other instances, cost changes are felt p r o p o r t i o n a l l y t h r o u g h o u t t h e l i n e . F o r i n s t a n c e , i n c r e a s e s i n alc o h o l t a x e s can have a proportional impact on the cost of liquor p r o d u c t s . T h e c o s t o f e a c h w i n e b o t t l e , f o r e x a m p l e , m a y in crease by 10 percent. One strategy for dealing with a cost change is to implement a co rr e s p o n d i n g p r i c e c h a n g e ; f o r e x a m p l e , w h o l e s a l e c o s t i n c r ements ( d e c r e m e n t s ) r e s u l t i n h i g h e r ( l o w e r ) r e t a i l p r i c e s . S u c h s t r a t eg i e s , h o w e v e r , m a y n o t c o n s i d e r t h e i n t e r a c t i o n s a m o n g t h e v a r ia n t s o f a r e t a i l p r o d u c t l i n e . T h e s e i n t e r a c t i o n s i m p l y t h a t i n a d dit i o n t o c o n s i d e r i n g t h e i m p a c t o f a v a r i a n t ' s p r i c e o n that variant's p r o f i t , i t i s v i t a l f o r t h e r e t a i l e r t o c o n s i d e r t h e im p a c t o f t h a t price on the profits of other variants in the line. Product Line Pricing

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Recent research suggests that these product line interactions may b e m o r e c o m p l e x t h a n p r e v i o u s l y b e l i e v e d . I n m a n y c a s es, pro ducts show a form of asymmetric demand relationship. Although lower quality brands are vulnerable to higher quality brand's price r e d u c t i o n s , h i g h- q u a l i t y b r a n d s d i d n o t s h o w t h i s v u l n e r a b i l i t y . R e s e a r c h s h o w s t h a t m a n y m o r e c o n s u m e r s a r e in c l i n e d to switch up to higher quality brands than switch down to lower quality b r a n d s . A s y m m e t r i c l i n e c o m p e t i t i o n i s n o w d o cum e n t e d i n b o t h i n- s t o r e e x p e r i m e n t s a n d h o u s e h o l d -l e v e l p u r c h as ing panel - data. W h e t h e r p r o d u c t v a r i a n t s i n a l i n e e x h i b i t a s y m m e t r i c d e m a n d r elationships or not, retailers must know how to adjust their prices i n r e s p o n s e t o v a r i o u s t y p e s o f c o s t s h o c k s . T h o s e a d j u s tments m u s t c o n s i d e r a l l p r o d u c t l i n e i n t e r a c t i o n s w h e t h e r t h e y a r e s ymm e t r i c o r n o t . O u r p a p e r a n s w e r s t h r e e k e y q u e s t i o n s n e c essary for a rapid response. First, when the costs of specific product c o m po n e n t s o r i n g r e d i e n t s c h a n g e , h o w s h o u l d r e t a i l e r s r e- adjust the prices of the affected product lines? Second, what will be the impact on profit margins, the range of prices in the line and the average price in the line? Finally, if a product is removed, perhaps s u d d e n l y , f r o m t h e l i n e , h o w s h o u l d t h e ret a i l e r a d j u s t t h e o t h e r prices in the line? W e a n s w e r e a c h o f t h e s e t h r e e q u e s t i o n s . T h e a n s w e r s d epend on t h e n a t u r e o f t h e d e m a n d relationships between the var i ants in the line. For example, consider a simple product line with two v a r i a n t s . W e f i n d t h a t w h e n d e m a n d f u n c t i o n s a r e l i n ear and p r o d u c t s d i s p l a y a s ymmetric demand relationship (i.e., changes i n t w o v a r i a n t ' s p r i c e s h a v e th e s a m e i m p a c t o n e a c h o t h e r ' s demand), then changes in the cost of one variant has no impact on the optimal price of the other variant. However, when the demand f u n c t i o n f o r a p r o d u c t l i n e i s l i n e a r a n d a n a s y m m e t r i c r e l a t i o nship exists, there is an inver se relationship between the cost of the lower quality variant and the optimal price of the higher q u ali t y v a r i a n t .

In general, when the cost of a variant reflects its quality, there are more than two variants in the line and the line displays a s y m m e t r i c d e m a n d r e l a t i o n s h i p s , w e f i n d t h e f o l l o w i n g i m p l i cations to be true.

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? ? ? ? ?

? ? ?

When a variant's cost decreases, the prices of all lowerquality variants should be decreased. W h e n a v a r i a n t ' s c o s t d e c r e a s e s , t h e p r o f i t m a r g i n s f o r l o wer -quality variants should be d ecreased. When a variant's cost decreases, the prices of all higherquality variants should be increased. When a variant's cost decreases, the profit margins for higher -q u a l i t y v a r i a n t s s h o u l d b e i n c r e a s e d . W h e n t h e c o s t o f m y v a r i a n t ( e x c e p t t h e h i g h e s t- qu a l i t y variant) increases, the range of prices in the line should decrease. When removing a variant from the line, the lower quality variant prices should be increased. When removing a variant from the line, the higher quality v a r i a n t p r i c e s s h o u l d b e d e cr e a s e d . When removing a variant from the line, the range of prices in the line should be decreased.

Beyond the implications for pricing strategies, these findings s h o u l d i m p a c t o t h e r a c t i v i t i e s s u c h a s p r o m o t i o n s a n d s e l l i n g eff o r t s b e c a u s e r e t a i l e r s o f t e n a l l o c a t e m o r e s e l l i n g e f f o r t s t o v a r ia n t s w i t h i n c r e a s e d m a r g i n s . A s t h e l i t e r a t u r e s u g g e s t s m ar gins a n d p r i c e r a n g e s i m p a c t a v a r i e t y o f m a r k e t i n g d e c i s i o n s i n c l uding t h e a l l o c a t i o n o f m a r k e t ing effort. Hence, by prescribing how m a r g i n s s h o u l d c h a n g e , o ur a n a l y s i s a l s o p r e s c r i b e s h o w retailers should reallocate effort. Therefore, when declining costs have a d i s p r o p o r t i o n a t e i m p a c t o n l o w -q u a l i t y p r o d u c t s , r e t a i l e r p r o m otions should emphasize the entire line. However, when those cost d e c l i n e s h a v e a d i s p r op o r t i o n a t e i m p a c t o n t h e h i g h- quality pro du c t s , r e t a i l e r p r o m o t i o n s s h o u l d s h i f t e m p h a s i s t o o n l y t h e h i g hquality products.

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8. CASE STUDY Most consumer product markets are characterized by several firms o f f e r i n g p r o d u c t l i n e s t h a t c l o s e l y m a t c h th o s e o f t h e i r c o m p e titors. The various companies are differentiated not so much by the t y p e o f p r o d u c t , b u t b y o t h e r f a c t o r s s u c h a s s t yl ing, warranties, r e p u t a t i o n s f o r r e l i ab i l i t y , b r a n d n a m e . M o s t c a r m a n u f a c t u r e r s , f o r e x a m p l e , t e n d t o o f f e r t h e s a m e r an g e o f c a r s i n t e r m s o f p o w e r , size, engine capacity, speed, etc. The way they vary is to have a s t y l i n g t h a t i s u n i q u e t o t h e i r w h o l e p r od u c t l i n e ( a n d t o t h e i r b r a n d n a m e ) , t h u s a l l o w i n g e c o n o m i e s o f s c o p e i n a d v e r t i s i n g , s e rv i c i n g , e t c . F i r m s s e e m t o w o rk v e r y h a r d t o p r o d u c e a l o o k t h a t i s u n i q u e , b u t n o t un i f o r m l y d e s i r e d b y a l l c o n s u m e r s ( h o r i z o n t a l differenti ation), while at the same time they offer products which can vary considerably in quality (vertical differentiation). T h i s s u g g e s t s t h a t f i r m s m ake an essentially two -dimensional p r o d u c t l i n e d e c i s i o n . T h e f i r s t i s t h e c h o i c e o f a s t y l i n g , o r c o mpany practice, that differentiates all of their products in some common way from those of their competitors. In the second s t a g e , e a c h c o m p a n y m a k e s a p roduct line deci s i o n w h i c h i n cludes the range of products they offer, and the corresponding price schedule. In many markets, firms change their style very seldom a n d w e t h e r e f o r e f o c u s o u r a n a l y s i s o n p r o d u c t l i n e rivalry for exogenously chosen styles. We show that firms create market power for themselves by differ entiating their whole product line to be able to price discriminate among consumers. Therefore, pro du c t l i n e r i v a l r y c a n b e v i e w e d a s a n e x amp l e o f o l i g o p o l i s t i c p r i c e discrimination. In our mod el we assume that firms locate in a point in style s p a c e , a n d p r o d u c e a p r o d u c t l i n e t h a t v a r i e s i n q u a l i t y . C o n s ume r s d i f f e r i n t h e i r i n c o m e a n d p r e f e r e n c e f o r s t y l e . I n t h i s f r a m ew o r k w e e x a m i n e t w o -p a r t p r i c e s c h e d u l e s t h a t i n c l u d e a f i x e d f e e a n d a m arkup, and study how price discrimin a t i o n v ar ies with competition and with consumers preferences for style. We prove that a non - cooperative equilibrium exists and show that, as competi t i o n i n c r e a s e s , p r i c e s a p p r o a c h m a r g i n a l c o s t . E v e n t h o u g h t h e p r e f e r e n c e s w e u s e a r e d e r i v e d f r o m t h o s e o f G a b s z ewicz and Thisse (1979), our model does not lead to their natural oligopoly result.

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The empirical part of the paper deals with the car market in five c o u n t r i e s o f t h e E u r o p e a n U n i o n . F o r o b v i o u s r e a s o n s , d e t a i l ed d a t a o n c o s t s a s w e l l a s ( i n m o s t c a s e s ) o n v o l u m e s a r e u n a v a i la b l e . T h e r e n o w e x i s t s ev eral papers in which authors are able to infer cost and demand parameters (See Berry, Levinsohn and Pakes (1995, 1998) Gold berg (1998) and Verboven (1996) for s u c h e x amples). Since our focus was different, we did not estim a t e t h e s t r u ct u r a l p a r a m e t e r s o f t h e m o d e l , a n d t o o k a s h o r t cut based on the theoretical model, where we derive our results by a s s u m i n g t h a t t h e e q u i l i b r i u m p r i c e -quality schedules are two -part tarif f s , w h o s e c o e f f i c i e n t s a r e p a r a m e t r i z e d w i t h r e s p e c t t o t h e d e g r e e o f c o m p e ti t i o n . H e r e , w e d i r e c t l y e s t i m a t e t h e s e p r i c e s c h e d u l e s , a n d f i n d e v i d e n c e t h a t E u r o p e a n p r o d u c ers use product l i n e s t o p r i c e d is criminate. B e f o r e t u r n i n g t o t h e d e t a i l s o f t h e m o del, let us note that, as B r a n d e r a n d E a t o n ( 1 9 8 4 ) h a v e p o i n t e d o u t i n t h e i r s t u d y o f p r o duct line rivalry, there is relatively little work on the sub ject. Their paper centers around the issue of entry deterrence and the choice o f s c o p e a n d h a s l i t t l e t o s a y a b o u t p r i c e d i s c r i m i n a t i o n . T h e e a rlier literature on product differentiation, has gener ally assumed that each firm produces a single quality product. More recently, Champsaur and Rochet (1985, 1989) addressed the question of m u l t i p r o d- u c t o l i g o p o l i s t s; h o w e v e r t h e a b s e n c e o f h o r i z o n t a l d i fferentiation in their model results in each quality being sold by at most one firm. Economides (1986) and Neven and Thisse (1990) study a model in which variety (i.e., horizontal differentiation) a n d q u a l i t y c h o i c e ( i . e . , v e r t i c a l d i f f e r e n t i a t i o n ) o f a s i n g l e p r o duct are endogenous; however, they do not examine the case of product line competition. Gilbert and Matutes (1993) focus on the issue of commitment in determining the scope of the firms price line offerings in a model with a discrete product space. Rochet a n d S t o l e ( 1 9 9 9 ) p r o v i d e a n e x t en sive theoretical framework to a d d r e s s t h e i s s u e o f n o n l i n e a r p r i c i n g i n a m u l t i d i m e n s i o n a l s e tting. T h e y s h o w , i n p a r t i c u l a r , that an efficient quality allocation with c o s t- plus -f e e p r i c i n g , e x a m i n e d i n t h i s p a p e r , e m e r g e s a s a n e q uilibrium outcome. The paper is organized as follows. In Section 2 we outline the t h e o r e t i c a l m o d e l a n d s t a t e o u r e x i s t e n c e a n d c o m p a r a t i v e s t a t ics results, for which proofs are given in the Appendi x. Section 3 d e a l s w i t h o u r e m p i r i c a l r e s u l t s . S e c t i o n 4 i s d e v o t e d t o c o n c l u ding comments. Product Line Pricing

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9. The model There is a market with differentiated products and there are n firms, indexed by I n c o n t r a s t t o m o st of the m o d e l s o f s p a t i a l c o mpetition, that typicall y deal with one dimensional choice spaces, we assume that firms compete with their product lines. That is, there is an observable characteristic which is common to all products of a given firm. In the case of the car m a r k e t t h i s m i g h t b e a f i r m s d i s t i n c t i v e s t y l i n g ( t h i n k , f o r e x amp l e , o f M e r c e d e s- Benz or BMW who have cars with a di s tinctive look). I t w i l l b e a s s u m e d t h a t t h e f i r m s l o c a t e s y m m e t r i c a l l y o n t h e c i rcle at locations (see Salop (1979), Novshek (1980), H o r s t m a n n a n d S l i v i n s k y ( 1 9 8 5 ) ) . T h e c i r c u m f e r e n c e L of the ci rcle will provide a measure of potential diversity. While many co ns u m e r s m a y w i s h t o b u y a p r o d u c t o f g i v e n s t y l e , t h e y w i l l i n g eneral also wish to choose among different qualities. Firms therefore offer a range of qualities F i rm i s p r o d u c t l i n e i s t h u s d e f i n e d b y The marginal cost o f p r o d u c i n g a g o o d o f quality q i s t h e s a m e f o r a l l f i r m s a n d takes the form c i (q) = cq. There is a continuum of consumers parameterized by their most preferred style and income. The space of consum ers is given by w h e r e M = [m L , m H ] a n d m L (m H ) d e n o t e s t h e l o w e r ( u p p e r ) b o u n d o f c o n s u m e r s i n c o m e . I t i s f u r t h e r m o r e as sumed t h a t c o n s u m e r s a r e u n i f o r m l y d i s t r i b u t e d o v e r Y and, without loss of generality, their total mass is equal to one. Each consumer p u r c h a s e s , a t p r i c e p , o n e u n i t o f p r o d u c t o f s t y l e s a n d q u a l i t y q. For any consumer t h e c h o i c e o v e r t r i pl e t s ( s , q , p ) is m a d e a c c o r d i n g t o t h e p r e f e r e n c e s r e p r e s e n t e d b y t h e u t i l i t y f u n ction:

(1) W h e r e | t s | i s t h e ( a r c ) d i s t a n c e b e t w e e n t w o p o i n t s o n s .The f i r s t t e r m i n ( 1 ) , | t s |, r e p r e s e n t s t h e d i s u t i l i t y o f a c o ns u m e r w h o s e p r e f e r r e d s t y l e i s t, b u t w h o b u y s a p r o d u c t o f s t y l e s . T h e s e c o n d t e r m , q (mp ) , r e p r e s e n t s t h e u t i l i t y f r o m Product Line Pricing

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c o n s u m i n g o n e u n i t o f a g o o d o f q u a l i t y q , at price p. T h i s i s essentially the functional form used by Gabszewicz and Thisse (1979) and Shaked and Sutton (1982), which guarantees that at given price, co ns u m e r s w i t h h i g h e r i n c o m e s p u t m o r e w e i g h t o n quality. S i n c e f i r m s a r e n o t a b l e t o o b s e r v e t h e c h a r a c t e r i s ti c s o f i n dividual consumers and charge a tailor-made price for each of them, t h e y c h o o s e p r i c e a s a f u n c t i o n o f q u a l i t y a l o n e . F o r r eas o n s o f t e c h n i c a l t r a c t a b i l i t y a n d p ot e n t i a l e m p i r i c a l a p p l i c a t i o n s , w e assume that price is an affine function of quali ty. The firms price schedules will therefore be restricted to two-part tariffs. Thus, a t y p i c a l s t r at egy of firm i i s which yields a price P i ( q ) = a i + b i q for quality q . When the marginal cost for p r o d u c i n g q u a l i t y q , f i r m i w i l l d i s c r i m i n a t e a m o n g i n d i viduals w i t h d i f f e r e n t t a s t e s f o r q u a l i t y . C u s t o m e r s o f f i r m i will buy the good of quality q yielding the highest utili ty, given by: (2) N o t e t h a t t h e q u a l i t y o f t h e g o o d c h o s e n b y a n i n d i v i d u a l d epends o n l y o n h i s i n c o m e . T h e r e f o r e , a c o n s u m e r w i t h i n c o me m will c o n s u m e a g o o d o f q u a l i t y q i (m ) and pay a price P i (m ) where: (3) and (4) We furthermore assume that for each q i (m ) is an interior solution, i.e., for all and and each ,

(5) E q u a t i o n ( 5 ) i m p l i e s t h a t t h e p r i c e s c h e d u l e s s a t i s f y a n o nbunchi n g p r o p e r t y : i f c o n s u m e r s w i t h d i f f e r e n t in comes decide to p u r c h a s e a p r o d u c t f r o m t h e s a m e f i r m , t h e y w i l l c h o o s e d i f f e r ent q u a l i t i e s o f t h e g o o d . T h i s n o n- bunching property guarantees t h a t q i (m) i s a s t r i c t l y in creasing function of income, so that a r i ch consumer will purchase a good of higher quality than a poor

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one. We next assume that there exists a positive following inequalities:

satisfying the

(6) This assumption implies that marginal cost pricing is itself a non-bunching strategy and sets upper and lower bounds of the possible range of incomes and qualities. T h e f u n c t i o n s V ( , ) , d e f i n e d b y ( 2 ) , e n a b l e u s t o d e r i v e , f o r each firm a m a r k e t a r e a I i ( ), given by:

(7) w h e r e x = (x 1 , . . . , xn ) . I n g e n e r a l , t h i s r e s u l t s i n m a r k e t a r e a s o v e r l a p p in g a t t h e b o u n d a r i e s . H o w e v e r , t h e s e i n t e r s e c t i o n s t y pically consist of sets of agents with measure zero and therefore do not affect the def i n i t i o n o f p r o f i t s . T h e p r o f i t o f f i r m i is:

(8) We now consider a non- cooperative game in which firm i s s t r ategy i s x i = ( ai, b i) and its payoff is given by (8). The parameter ai r e p r e s e n t s w h a t i s u s u a l l y c a l l e d a f i x e d f e e, w h e r e a s t h e d i f f e re n c e b i - c i s a markup . (See Gilbert and Matutes (1993), Armstrong and Vickers (1997), Stole and Rochet (1999).) Since fir m s a r e i d e n t i c a l w e c o n s i d e r o n l y s y m m e t r i c N a s h e q u ilibria and drop the firm index i in what follows. Note that the e q u i l i b r i u m o u t c o m e s d e p e n d o n n , L and the width of the quality a n d i n c o m e r a n g e s ; h o w e v e r , L a n d n affect equilibria only via the t e r m L/ n, w h i c h i s t h e w i d t h o f t h e m a r k e t a r e a s I i (x ) a t a s ymmetric equilibrium. Clearly, when L is fixed, the number of firms n r e p r e s e n t s t h e l e v e l o f c o mp e t i t i o n : a s n t e n d s t o i n f i n i t y t h e m a r k e t a p p r o a c h e s p e r f e c t c o m p e ti t i o n .

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O u r f i r s t r e s u l t s ho w s t h a t w h e n t h e r a n g e o f i n c o m e s ( r e p r es e n t e d b y t h e r a t i o o f t h e h i g h e s t t o t h e l o w e s t i ncome a n d t h e n u m b e r o f firms are large, then a unique Nash equilibrium will exist. Fo rm a l l y , P r o p o s i t i o n 1 : T h e r e a r e a n d s u c h t h a t f o r al l there exists a unique sy m m e t r i c N a s h e q u i l i b r i u m . Since we keep the bounds on consumers incomes fixed, we shall denote the firms equilibrium strategies by and the equilibrium price schedules by Using (3) and (4), this yields quality and price f u n c t i o n s denoted P r o p o s i t i o n 2 ex a m i n e s t h e p r o p e r t i e s o f t h e e q u i l i b r i u m strategies and price functions.Proposition 2 :There exists such that for all

( i i i) The firms profit is a decreasing function of i n come m. T h e a s s e r t i o n s o f P r o p o s i t i o n 2 a r e f a i r l y i n t u i t i v e . A s s e r t i o n (i) s h ow s t h a t , a s t h e l e v e l o f c o m p e t i t i o n i n c r e a s e s , e q u i l i b r i u m p r i c e s a p p r o a c h m a r g i n a l c o s t s . A s s e r t i o n ( ii ) i m p l i e s t h a t i n c r e a si n g c o m p e t i t i o n g e n e r a t e s a d e c l i n e o f t h e f i x e d p a r t a n d a n inc r e a s e o f t h e v a r i a b l e p a r t o f t h e e q u i l i b r i u m t w o- part price s c h e d u l e . A s s e r t i o n (i i i ) c a n b e e x p l a i n e d b y t h e f a c t t h a t t h e m a r k u p d e c l i n e s w i t h q u a l i t y , w h i c h i t s e l f i s a n i n c r e a s i n g f u n c tion of income. It is important to note, therefore, that since the markup of prices on costs is not constant, product lines are used as a price discriminating device. This suggests the possibility of i n f e r i n g t h e d e g r e e o f c o m p e t i t i o n f r o m e x a m i n i n g t h e e q u i l ibrium price schedules.

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10.

Discrimination in the European car market

S i n c e w e s h a l l b e d i s c u s s i n g p r i c e d i s c r i m i n a t i o n i n B e l g i um, F r a n c e , G e r many, Italy and the United Kingdom, some comments on the five markets are in order. Casual observation seems to lend support to the assumption t h a t B e l g i u m i s t h e m o s t c o m p e t i t i v e m a r k e t . In d e e d , t h e r e i s n o Belgian domestic producer, while the four other countries all have o n e o r s e v e r a l p r o d u c e r s e n j o y i n g s o m e d e g r e e o f p r o t e c t i o n . B elgium is also widely open to Japanese imports. Finally, producer prices are significantly lower in Belgium than in all other countries ( s e e B E U C ( 1 9 8 4 , 1 9 8 6 ) a s w e l l a s M e r t e n s a n d G i n s- burgh (1985) and Ginsburgh and Vanhamme (1989)). These observations are backed up by the fact that producers complain about Belgian price regulations leading to insufficient profits, or even losses in some c a s e s . O n t h e o t h e r end of the spectrum, the United Kingdom is c h a r a c t e r i z e d b y r i g h t -h a n d d r i v i n g w h i c h i s o l a t e s t h e B r i t i s h m arket and makes it difficult for consumers to import their car from C o n t i n e n t a l E u r o p e ; m o r e o v e r , a s u bs t a n t i a l p a r t o f p ri vate cars is owned by co mpanies. France, Germany and Italy are endowed with characteristics which lie between these two extreme cases. I t s h o u l d a l s o b e s t r e s s e d t h a t t h e r e e x i s t e x c l u s i v e a g r eements b e t w e e n p r o d u c e r s a n d d e a l e r s . T h i s m a y t u r n o u t t o imp o s e n o nt a r i f f b a r r i e r s bet w e e n t h e v a r i o u s c o u n t r i e s a n d , t h o u g h i t d o e s n o t c o m p l e t e l y p r e v e n t a r b i t r a g e , i t m a k e s i t rat h e r d i f f i c u l t . A n individual consumer from say France, can buy his car in Belgium ( d i f f e r e n c e s i n r e g u l a t i o n s t e n d h o w e v e r t o m a k e t h i s q u i t e d i f ficult and time consuming), but dealers can hardly organize arbitrage on a large scale basis, though this is slowly changing over t h e y e a r s . 2 A s w a s p o i n t e d o u t i n t h e i n t r o d u c t i o n , w e d i d n o t estimate the structural c o e f f i c i e n t s o f t h e m o d e l , b u t t o o k t h e s h o r t c u t to e s timate the equilibrium price-q u a l i t y s c h e d u l e s Pi c ( q ) = a ic + b ic q ic i n t h e v a r ious cou n tries c where p r o d u c e r i i s a c t i v e a n d t o c h e c k w h e t h e r t h e c o e f f i c i e n t s a ic and bic satisfy a s s e r t i o n ( i i ) o f P r o p o s i t i o n 2 , i . e . w h e t h e r a i c a n d b i c ' < b ic in a c o u n t r y c t h a t i s a p r i o r i - s e e a b o v e - a s s u m e d t o b e l e s s c o mp e t i t i v e t h a n c o u n t r y c " . T h e u n i q u e q u a l i t y q c o n si d e r e d i n t h e t h e o r e t i c a l m o d e l w i l l b e r e p l a c e d b y a v e c t o r o f c h a r a c t e r i s t i c s z. The characteristics used are engine capacity, speed and l e n g t h -

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w h i c h a r e c o n t i n u o u s v ar i a b l e s - and a dummy variable which represents the type of fuel used, diesel or gasoline. F o r e v e r y p r o d u c e r i s e l l i n g i n c o u n t r y c, t h e f o l l o w i n g r e g r ession is comp u t e d :

E a c h r e g r e s s i o n i c i s c o m p u t e d b y p o o l i n g o b s e r v a t i o n s b e l o ng ing to three years (1988, 1989 and 1990). The variables are as f o l l o w s : p i cj t i s t h e p r i c e o f m a k e j s o l d i n y e a r t ; y l i s a d u m m y v a r i a b l e w h i c h t a k e s t h e v a l u e o n e i f o b s e r v a t i o n ( i c , j t ) c o r r es p o n d s t o y e a r l = t and is the value of the kth c h a r a c t e r i s t i c . T h e a s and s a r e r e g r e s s i o n c o e f f i c i e n t s - the i nt e r c e p t s a and the slopes b of the theoretical model. Note that t h e d e p e n d e n t v a r i a b l e i n e a c h r e g r es s i o n i s t h e l o g a r i t h m o f t h e p r i c e , a n d n o t t h e p r i c e i t s e l f ; t h i s i s d o n e t o r e d u c e a ny poss ible h e t e r o s k e d a s t i c i t y . T h e t h e o r e t i c a l m o d e l o f S e c t i o n 2 , i s li near, b u t n o t h i n g t h e r e p r e v e n t s t o r e s c a l e d i f f e r e n t l y t h e q u a l i t y v a r iable(s).
2

The European Court in Luxemburg had to deal with such cases, and ruled against dealers who were not officially selected by producers. In 1999, the European Commission imposed a Euro 102 million fine on Volkswagen who was forbidding Italian dealers to sell cars to Austrian and German customers, since prices in Austria and Germany were much higher than in Italy.

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W e r a n 1 1 7 s u c h i n d i v i d u a l r e g r e s s i o n s , 3 w h i c h m a k e s i t i m p o s sib l e t o g i v e t h e d e t a i l e d r e s u l t s . T a b l e 1 m e r e l y r e p o r t s t h e d i s t r ib u t i o n o f t h e R 2 s , s h o w i n g t h a t m o s t a d j u s t e m e n t s a r e v e r y s a t i sfactory. Next, we ran, for each producer i , various hypothesis tests on the ( i n ) e q u a -lity of the regression coefficients across countries. 4 The r e s u l t i n g F- tests are reported in Table 2 and show that the joint t e s t o n e q u a l i t y o f i n t e r c e p t s and slopes is rejected in all cases, with the exception of Jaguar- D a i m l e r . T h i s l e a d s u s t o c o n clude that the price shedules set by producers for their product lines are significantly different across countries. The joint test on slopes only also rejects equality in most cases. T h i s s e e m s t o i m p l y t h a t p r o d u c e r s u s e c h a r a c t e r i s t i c s i n o rder to p r i c e d i s c r i m i n a t e , b u t d o e s n o t i n d i c a t e w h e t h e r a s s er t i o n (i i) of Proposition 2 holds. To check for this, we have ranked cou n tries a c c o r d i n g t o t h e v a l u e s o f t h e i n t e r c e p t s o r o f t h e s l o p e s o n eng i n e c a p a c i t y a n d s p e e d ; t h e s e a r e t h e c h a r a c t e r i s t i c s t h a t a r e o ften used to distinguish a car in a product line viz. BMW 1600, 1800 or Ford GT, GTI, etc. T h e r e s u l t s o f t h e s e r a n k i n g s a r e g i v e n i n T a b l e 3 , 5 which gives the number of times a country is ranked lowest, second lowest, et c . f o r t h e i n t e r c e p t o f t h e r e g r e s s i o n s a s w e l l a s f o r e a c h o f t h e s l o p e c o e f f i c i e n t s c o r r e s p o n d i n g t o c h a r a c t e r i s t i c s ( e n g i n e c a p acity, speed). For instance, Belgium has the smallest intercept in 8 c a s e s ( o u t o f 2 0 ) , t h e s e c o n d s m all e s t i n 1 1 c a s e s , e t c . , w h i l e i t h a s t h e s m a l l e s t s l o p e o n e n g i n e c a p a c i t y o n l y o n c e , t h e s e cond smallest in 3 cases, and the largest in 7 cases. We also compute t h e m e a n r a n k f o r e a c h c o u n t r y . T h i s s h o w s t h a t B e l g i u m c o r r esponds to the most competitive country (lowest mean ran k f o r i nt e r c e p t a n d h i g h e s t f o r s l o p e s o n c h a r a c t er istics), 6 while the United Kingdom corresponds to the least competitive (highest mean rank for intercepts and lowest for slopes), which is consistent with the theoretical implications of t h e m o d e l a n d w i th the above discussion.

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11.

Conclusions

We have considered a model of oligopolistic competition which incorporates both horizontal and vertical product differentiation. Firms choose a location in style space and select a product line of different qualities. We show that a noncooperative equilibrium exists. Taking these two views of new product introductions to their logical end suggests a possible rational for why some firms may support research and development departments and marketing departments that are prolific but slow. Product lines that grow slowly| but never stop to grow|over time are most efficient at solving the time inconsistency problem. We analyze firms pricing strategies by specifying a supply-side model with competing manufacturers who sell through a common retailer. The first decsion we investigate is firms pricing strategies across the product lines they cary. While the price differences between product lines appear to be driven primarly by cost differences, in several instances the evidence suggests that manufactturers are using product lines as price discrimination tools. Second, we look at firms pricing decisions across flavors within a product line. We conduct a what-if-type experiment to determine if firms profits would increase if they were to price flavors individually and conclude that this is not the case. This finding suggests that firms strategy of setting equal prices for all flavors within a given product line is indeed optimal. We also study the properties of the equilibrium style and product line seletions and show that if the degree of competition increases, prices approach marginal cost. The model is applied to the European car market; the results support the theoretical conclusion that producers use product lines to price discriminate across countries.

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