Product Line Selection and Pricing with Modularity in Design

TLDR

The study examines how modular design influences optimal product line length and pricing. The authors model consumer demand with a Bayesian logit framework, decompose operational costs into design and production components, and analyze how modularity level and production cost affect price markups and market shares. Results show that lower development costs from modularity always encourage more variety, while lower production costs can lead risk‑averse firms to reduce variety in multi‑segment markets, and that optimal line length increases with risk aversion following a monotonic weak majorization order.

Abstract

This paper addresses the strategic impact of modular design on the optimal length and price of a differentiated product line. We represent consumer demand with a Bayesian logit model. We also break operations costs into product design and production components. Our analysis shows that reducing product development costs via modular design always makes it attractive to offer greater product variety. However, reducing production costs can sometimes motivate a reduction in variety for a risk-averse producer in a multiple-segment market. We also characterize the impacts of degree of modularity and production cost on price markup and market share. Finally, we show that the optimal product line length is monotonic in risk attitude and the monotonic weak majorization, partial order on product assortment.