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Product positioning in a two-dimensional market space

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The authors examine the optimal composition of a firm's product portfolio in multi-attribute markets, where customer preferences are defined by multiple (two) dimensions. Every product offers utility to consumers through its quality level and its conformance to the customer's ideal feature preference. The feature choice has no impact on cost, while product quality exhibits convex increasing costs. The end-products are development intensive, i.e., volume-dependent production costs are small compared to design and development costs. Such cost structures are often encountered in the software industry. Customers are heterogeneous both in their quality valuation and in their ideal feature preference, and they suffer a quadratic loss from feature deviations. A monopolist positions an arbitrary number of products in the market and optimizes the number of products, their features, prices, and qualities. If customers are uniformly distributed in this market and if the deviation losses are the same for all products, it is not optimal to vertically differentiate. Instead, products are differentiated only through their features. When the distribution of customers is non-uniform or the deviation costs differ, they show numerically that, in optimal positioning, products differ in price and quality.

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