Product Line Design with Deliberation Costs: A Two-Stage Process

Hui Xiong () and Ying-Ju Chen ()
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Hui Xiong: Tsinghua University, Beijing 100084, P. R. China
Ying-Ju Chen: University of California at Berkeley, Berkeley, California 94720

Decision Analysis, 2013, vol. 10, issue 3, 225-244

Abstract: Motivated by the current practice of some service industries, we study a two-stage product line design problem in the presence of private consumer deliberation costs. In this problem, consumers pay an upfront payment before accessing the products. A consumer may incur a cost to introspect about her preferences, and the product line design enables the seller to encourage or discourage introspection. Getting consumers to deliberate about their preferences benefits them and the seller, because it facilitates a tailored product line. However, in so doing, the seller is forced to compensate the consumers for their cognitive cost of deliberation. We show that this compensation causes the seller an additional expense to avoid cannibalization across product lines. If the heterogeneity in deliberation costs is high, the seller is better off by offering a compromise product to consumers with high deliberation costs to discourage them from deliberation. The seller does not intentionally downward distort the qualities and optimally designs the product line that is ex-post socially efficient instead. This is because the seller is able to counterbalance the loss of second-stage information asymmetry by charging the upfront payment. Nonetheless, heterogeneity on consumer deliberation costs leads to an unambiguous reduction of consumer deliberation.

Keywords: deliberation cost; product line design; adverse selection; dynamic mechanism design (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ordeca:v:10:y:2013:i:3:p:225-244

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