Date of this Version
Costs are an important determinant of prices charged by ﬁrms. The primary purpose of this paper is to study the impact of costs associated with diﬀerentiation and niche strategies on ﬁrm’s positioning and pricing decisions in a horizontally diﬀerentiated market. We analyze both sequential and simultaneous entry cases. In the sequential case, the cost of diﬀerentiation is an additional cost incurred by the second entrant and it depends on the degree of diﬀerentiation between itself and the ﬁrst mover. The cost of following a niche strategy is a market level cost aﬀecting both ﬁrms whereby ﬁrms incur a positive or negative cost if they want to make a niche product. Our analysis provide some surprising results, explains some conﬂicting empirical observations documented in previous research, and may also be useful for further empirical research in this area by providing sharper predictions about the impact of various types of costs on market outcomes. For example, we ﬁnd that under some circumstances the cost disadvantaged ﬁrm can enjoy higher price-cost margins compared to the cost leader thereby suggesting that higher costs are a blessing in disguise. We also show analytically that a ﬁrm following diﬀerentiated or niche strategies charges a higher price than the cost leader if the cost of diﬀerentiated or niche strategy is suﬃciently high and vice versa.
game theory, pricing, differentiation, niche strategies, cost leadership, hotelling models
Sajeesh, S., & Raju, J. S. (2007). Differentiation, Niche and Cost Leadership Strategies: A Hotelling Based Analysis. Retrieved from https://repository.upenn.edu/marketing_papers/304
Business Administration, Management, and Operations Commons, Business Analytics Commons, Business Intelligence Commons, Marketing Commons, Operations and Supply Chain Management Commons, Organizational Behavior and Theory Commons, Sales and Merchandising Commons, Strategic Management Policy Commons
Date Posted: 15 June 2018