Strategic underproduction with product switching

It is well known that some consumers switch to other products if their most preferred products are not available. To be competitive, therefore, it is essential that the design of a product line reflects the switching patterns of the consumers, based on their lower order preferences. In this paper, the authors formalize the treatment of consumer switching patterns, to show how a firm’s choice of product quantities of the products in a line, in relation to those of the competitors’ products, can be used as a competitive weapon. They show that there exists a strategy that creates opportunities for the firm to increase its product line profit to a level higher than otherwise possible, for any particular market share. The authors also establish certain properties of the competitive environment which identify the scenarios under which different variations of such a strategy could be successful.