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How to protect your premium product from low-price competitors: Price, quality, or portfolio adjustment?

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  • Jost, Peter-J.

Abstract

In a game-theoretic framework, I analyze how a brand manufacturer can thwart new entrants into its market. Three strategic options are considered, a price adjustment of the premium product, a quality adjustment of the premium product and a portfolio adjustment of adding a fighter brand. In a basic setup, I show that the incumbent's best response to entry is to choose a portfolio adjustment. If, however, the incumbent is uncertain about whether the rival firm will enter the market, a price adjustment of the premium product might be the better alternative if launching the fighter brand is associated with costs. Moreover, if technological progress improves the efficiency of product development, a combined quality and portfolio adjustment might be the best alternative for the incumbent.

Suggested Citation

  • Jost, Peter-J., 2014. "How to protect your premium product from low-price competitors: Price, quality, or portfolio adjustment?," International Journal of Research in Marketing, Elsevier, vol. 31(3), pages 253-265.
    • Handle: RePEc:eee:ijrema:v:31:y:2014:i:3:p:253-265
    DOI: 10.1016/j.ijresmar.2013.11.001
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    References listed on IDEAS

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    1. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(1), pages 3-13.
    2. repec:bla:econom:v:64:y:1997:i:254:p:265-79 is not listed on IDEAS
    3. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
    4. Cabral, Luís M.B., 2009. "Umbrella branding with imperfect observability and moral hazard," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 206-213, March.
    5. Choi, Chong Ju & Shin, Hyun Song, 1992. "A Comment on a Model of Vertical Product Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 229-231, June.
    6. Taylor Randall & Karl Ulrich & David Reibstein, 1998. "Brand Equity and Vertical Product Line Extent," Marketing Science, INFORMS, vol. 17(4), pages 356-379.
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