by Venkatesh Shankar
This article was published in Management Science, 52 (February 2006), 276-292.
To what extent do firms increase (product proliferation strategy) or decrease (product pruning strategy) their product line? Do they change their product line simultaneously with changes to their prices and distribution levels? What drives these changes to product line? To what extent are they proactive versus reactive? Are product line changes similar for market leaders and followers? The answers to these questions can help managers develop more effective product line strategies. We present a framework and model to answer these questions and analyze product line strategies of firms using data from the computer printer market comprising the market leader, Hewlett Packard (HP) and followers, Epson, Canon and Lexmark. The results show that the market leader practices a product proliferation strategy and rarely fights on price. In contrast, market followers adopt a price fighting strategy. A firm is more likely to engage in product line actions when its competitors changed their product lines in the past, when the firm is large, and when its price is high. Product line reaction elasticities (percentage change in product line length with respect to percentage past change in competitor’s marketing variable) are different from product line anticipation elasticities (percentage change with respect to percentage anticipated future change). They are also different for market leaders and followers. For the market leader (followers), product line reaction elasticity is higher (lower) than product line anticipation elasticity. These differences are related to product line demand elasticities, which are higher for the market leader than they are for the followers. Managers of market leaders (followers) can formulate better product line strategies based on these likely proactive and reactive actions of market followers (leaders). They can use our model to estimate reaction, anticipation and demand elasticities of the different firms in their markets and develop a decision support system for effective product line decisions.