Product Repositioning in a Horizontally Differentiated Market
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Product Repositioning in a Horizontally Differentiated Market Hiroki Kishihara1,2 · Nobuo Matsubayashi1
© Springer Science+Business Media, LLC, part of Springer Nature 2019
Abstract We study product repositioning between firms with predetermined base positions for their products in existing markets. Based on Hotelling’s linear city model, we attempt to generalize models in past studies by encompassing asymmetric base positions and asymmetric cost-efficiency in repositioning. We find that neither base products nor new products in attractive positions in the market necessarily imply competitive advantage. In particular, a potentially cost-inefficient firm can earn higher profits than does a rival, even though the former firm’s product is in a less attractive position. We also clarify the welfare implications for regulating or encouraging firms’ repositioning activities. Keywords Hotelling’s duopoly · Core product · Repositioning cost
1 Introduction When incumbent firms offer new products for a new segment in the market, it is important for them to consider the difference in market conditions between their current and new markets carefully.1 However, it is not easy for established firms with existing core products to offer new products with different market positions successfully—even if their existing and new products do not directly cannibalize each other. A famous example is that in the 1980s, to grab market share from PepsiCo, Coca-Cola changed the taste of its traditional Coca-Cola and launched a new 1
This is a standard issue in any business strategy course.
* Nobuo Matsubayashi nobuo‑[email protected]‑net.ne.jp Hiroki Kishihara [email protected] 1
Department of Administration Engineering, Faculty of Science and Technology, Keio University, Hiyoshi 3‑14‑1 Kohoku‑ku, Yokohama 223‑8522, Japan
2
Present Address: Nippon Steel Corporation, 1 Oaza‑Nishinosu, Oita City, Oita Prefecture 870‑0992, Japan
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product that was named “New Coke” (Project Kansas). However, many Coca-Cola drinkers complained about this change. The company changed its mind and returned to the old Coca-Cola formula.2 In this example Coca-Cola’s repositioning was likely expensive. In fact, regardless of whether a firm stops producing an old product and keeps the same product name as an old product, various costs seem relevant in repositioning activities in horizontally differentiated markets, such as introducing new facilities, changing a flavor, and advertising to raise awareness among consumers of the new position. For example, General Motors (GM) offered a new plug-in-hybrid (PHV) car under the Chevrolet brand, accompanied with a repositioning from a traditional gasoline-powered vehicle to an environmentally-friendly car. For this repositioning, the company invested 336 million USD to establish a new plant in Detroit (see GM 2009). In considering these types of costs that are associated with repositioning to introduce new products, which we refer to as “repositioning cost” here, our
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