Commonality in product design: Cost saving, valuation change and cannibalization

Offering a variety of products is important for a firm to attract different consumer segments. However, high product variety increases production and distribution costs. Modular product design and parts commonality are approaches used to counter this trend in cost and still offer a variety of products. This paper develops a model to examine when modular products should be introduced and how much modularity to offer. The model looks at a market consisting of a high segment and a low segment. Customers choose the product that maximizes their surplus, which is defined as the product's utility minus its price. Presence of commonality affects the utility of a product. Greater commonality decreases production cost but makes the products more indistinguishable from one another. This makes the product more desirable for the low segment but less desirable for the high segment. The firm's objective is to design the products and set the prices so as to maximize its profit.