Michaela Draganska and Dipak C. Jain
The increasing number of consumer goods and services offered in recent years suggests that product-line extensions have become a favored strategy of product managers. A larger assortment, it is often argued, keeps customers loyal and allows firms to charge higher prices. There is disagreement, however, about the extent to which a longer product line translates into higher profits. We develop an econometric model derived from a game-theoretic perspective that explicitly considers firms’ use of product-line length as a competitive tool. On the demand side, we analytically establish the link between consumer choice and the length of the product line. Based on our derivations, we include a measure of line length in the utility function to investigate consumer preference for variety using a brand-level discrete-choice model. The supply side is characterized by price and line length competition between oligopolistic firms. For the empirical analysis we use market-level data for the yogurt category. We find that there are decreasing returns to product-line length. Based on a series of “what-if” experiments, we derive recommendations for effective product line decisions in a competitive environment.