Product design with attribute dependence

Abstract

This paper studies how product design and pricing strategies are affected by the existing relationship between the characteristics that integrate the product. The analysis shows that complementarity and low substitutability encourage the provision of quality incorporated to the products and increase the quality distortion and cannibalization problems that are common in segmented markets. A two-product strategy with a common attribute is shown to be a feasible strategy for reasons other than cost savings, namely attribute dependence. In addition, menu pricing is found to be the most profitable strategy, and a commonality strategy is more profitable than a common-product strategy.