MARKET SEGMENTATION STRATEGIES OF MULTIPRODUCT FIRMS*

doi:10.1111/j.1467-6427.2006.00278.x

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Wiley InterScience

The Journal of Industrial Economics

Volume 54 Issue 1, Pages 125 - 149

Published Online: 15 Mar 2006

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MARKET SEGMENTATION STRATEGIES OF MULTIPRODUCT FIRMS^*

ULRICH DORASZELSKI† and MICHAELA DRAGANSKA‡

†Department of Economics, Harvard University, Littauer Center, Cambridge, Massachusetts 02138, U.S.A. doraszelski@harvard.edu
‡Graduate School of Business, Stanford University, 518 Memorial Way, Stanford, California, 94305-5015, U.S.A. draganskamichaela@gsb.stanford.edu

^*We would like to thank Yuxin Chen, Dino Gerardi, Ken Judd, and Ted Turocy for constructive suggestions. Finally, we are grateful to the editor and two anonymous reviewers for their helpful comments.

Abstract

We analyze a multiproduct duopoly and ask whether firms should offer general purpose products or tailor their offerings to fit specific consumer needs. Offering a targeted product has two effects: utility increases for some consumers due to increased fit, whereas utility decreases for others due to increased misfit. Previous work has not considered these two effects jointly and has therefore not been able to capture the tradeoff inherent in market segmentation. We show that in addition to the degree of fit and misfit, the intensity of competition and the fixed cost of offering an additional product determine firms' market segmentation strategies.

DIGITAL OBJECT IDENTIFIER (DOI)

10.1111/j.1467-6427.2006.00278.x About DOI