Competing for Low-End Markets

Wilfred Amaldoss () and Woochoel Shin ()
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Wilfred Amaldoss: Fuqua School of Business, Duke University, Durham, North Carolina 27708
Woochoel Shin: Warrington College of Business Administration, University of Florida, Gainesville, Florida 32611

Marketing Science, 2011, vol. 30, issue 5, 776-788

Abstract: Recent business research points to the fortune awaiting to be tapped in low-end markets. In this paper, we investigate how the size of the low-end market influences a firm's profits and the pioneering firm's quality choice. As low-valuation consumers increase in a market, on average, consumers' willingness to pay decreases. This may lead us to expect firms' profits to decrease as the size of the low-end market increases. Our analysis shows that, if the size of the low-end market is below a threshold, an increase in the size of the low-end market may actually dampen price competition and improve profits, as firms can then strategically choose their quality levels such that their products are more differentiated. Conventional wisdom also suggests that the pioneering firm will offer a higher-quality product and earn more profits compared with the later entrant. In contrast to this notion of quality advantage, our analysis identifies circumstances in which a pioneer can offer a lower-quality product and yet earn more profits. An experimental test lends support for some of our model's predictions. We further extend the model to consider markets with multiple firms, firms with multiple products, and consumers with limited purchasing power.

Keywords: low-end markets; quality leadership; pioneering advantage; vertical differentiation; experimental economics (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:30:y:2011:i:5:p:776-788

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