Positioning and Pricing in a Variety Seeking Market

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.variety seeking, positioning, pricing, differentiation, hotelling models

Vertical Differentiation with Variety-Seeking Consumers

“…They show that if a subset of consumers have a preference for variety, then equilibrium levels of product differentiation will be lower than the level that would be obtained without a consumer preference for variety, though not to the minimum differentiation we find. In contrast with our results, Sajeesh and Raju's (2010) model finds the presence of variety-seeking consumers always reduces profits. Guo (2006) presents another related model in a horizontally differentiated setting by examining a duopoly with forwardbuying consumers who are uncertain of their future preferences.…”

“…Our result is in the same direction as the findings of Sajeesh and Raju (2010), who find that preferences for variety reduce the equilibrium level of product differentiation in a horizontal-differentiation model, although they do not find minimum differentiation as we do. Under Sajeesh and Raju's model, margins for each firm shrink to zero under minimum differentiation.…”

“…Another departure from previous models of competition with a consumer preference for variety (Seetharaman andChe 2009, Sajeesh andRaju 2010) is that we abstract from dynamic considerations and examine a static model in which the price of the first unit is the same as the price of the second unit. This assumption acknowledges menu costs and the fact that in the industries we consider-ski resorts, amusement parks, and restaurants-prices do not tend to vary on a consumption-experience basis within the time frames we consider, such as a weekend.…”

“…Therefore, helping the inferior firm improve is a win-win strategy. In a complementary paper, Sajeesh and Raju (2010) examine the impact of variety seeking on location competition in a two-period horizontal Hotelling model. They show that if a subset of consumers have a preference for variety, then equilibrium levels of product differentiation will be lower than the level that would be obtained without a consumer preference for variety, though not to the minimum differentiation we find.…”

Consumers’ Variety Seeking: From an Information Perspective

“…In this case, the combination of vices and virtue can be interpreted as a more various bundles compared to an isolation choice. Researches also connect variety seeking with business strategies such as positioning and pricing (Sajeesh & Raju, 2010).…”