Positioning and Pricing in a Variety Seeking Market

Management Science, 56 (6), 949-961, 2010

Posted: 8 Mar 2013

See all articles by S. Sajeesh

S. Sajeesh

University of Nebraska - Lincoln

Jagmohan S. Raju

University of Pennsylvania - Marketing Department

Date Written: June 2010

Abstract

We study competitive positioning and pricing strategies in markets where consumers seek variety. Variety seeking behavior is modeled as a decrease in the willingness to pay for the product purchased on the previous purchase occasion. Using a three-stage Hotelling-type model, we show that the presence of variety seeking consumers reduces product differentiation offered in equilibrium, thereby explaining some otherwise counterintuitive findings in empirical research. We find that firms charge higher prices in Period 1 and lower prices in Period 2. The lower price in Period 2 represents the price incentive that firms need to offer to prevent the variety seeking consumers from switching. Furthermore, we find that the observed switching in a market may not fully capture the true magnitude of the underlying variety seeking tendencies among consumers. Finally, we show that the presence of variety seeking consumers leads to lower firm profits and a higher consumer surplus. Surplus increases for variety seeking consumers as well as regular consumers. Therefore, the presence of variety seeking consumers benefits everyone in the market.

Keywords: Variety Seeking, Positioning, Pricing, Differentiation, Hotelling models

JEL Classification: D43, M31

Suggested Citation

Sajeesh, S. and Raju, Jagmohan S., Positioning and Pricing in a Variety Seeking Market (June 2010). Management Science, 56 (6), 949-961, 2010, Available at SSRN: https://ssrn.com/abstract=2229399

S. Sajeesh (Contact Author)

University of Nebraska - Lincoln ( email )

United States

Jagmohan S. Raju

University of Pennsylvania - Marketing Department ( email )

700 Jon M. Huntsman Hall
3730 Walnut Street
Philadelphia, PA 19104-6340
United States
215-898-1114 (Phone)
215-898-2534 (Fax)

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