Consumer preferences and product-line pricing strategies: An empirical analysis

Firms often differentiate their product lines vertically to capture consumers' differential willingness to pay for quality. Additionally, many firms offer products varying not in quality but in characterisitics such as scent, color, or flavor, that relate to horizontal differentiation. For example, in the yogurt category, each manufacturer carries several product lines differening in quality and price, but within each line there is an assortment of flavors that is uniformly priced. To better understand these product-line pricing strategies, we address two key issues. First, how do consumers perceive product-line and flavor attributes? Second, given consumers' preferences, is the current strategy of pricing product lines differently, but offering all flavors within a product line at the same price, optimal? We find that consumers value line attributes more than flavor attributes. Our analysis reveals that firms exploit these differences in consumer preferences by using product lines as a price discrimination tool. However, firms' profits would not significantly increase if they were to price flavors within a product line differently. Therefore, the current pricing policy of setting different prices for product lines, but uniform prices for all flavors within a line, appears to be on target.