Product positioning in a two-dimensional market space

Product positioning is an important decision for firms wishing to explore new markets or exploit existing ones. How to accurately represent markets and products with a model is essential for the decision of product positioning. My thesis uses a model that is related to existing literature from marketing, economics and operations management, and the analysis has produced new insights.; The first part of the thesis examines the optimal composition of a firm's product portfolio in multi-attribute markets, where customer preferences are defined by multiple (two) dimensions. Every product offers utility to consumers through its quality level and its conformance to the customer's ideal feature preference. The feature choice has no impact on cost, while product quality exhibits convex increasing costs. The end-products are development intensive, i.e. volume-dependent production costs are small compared to design and development costs. Such cost structures are often encountered in the software industry. Customers are heterogeneous both in their quality valuation and in their ideal feature preference, and they suffer a quadratic loss from feature deviations. A monopolist positions an arbitrary number of products in the market and optimizes the number of products, their features, prices, and qualities. If customers are uniformly distributed in this market and if the deviation losses are the same for all products, it is not optimal to vertically differentiate. Instead products are differentiated only through their features. When the distribution of customers is non-uniform or the deviation costs differ, we show numerically that in optimal positioning products differ in price and quality.; The second part examines the optimal product portfolio composition for a monopolist firm in a two-dimensional market in which both vertical and horizontal differentiation are possible. We derive a theoretical framework that explains under which circumstances the firm should seek vertical or horizontal differentiation. This article generalizes previous work in which it was assumed that all customers buy one product (the "market coverage" assumption) or that volume-independent costs dominate over volume-dependant costs. In the presence of significant volume-dependant manufacturing costs, the optimal portfolio contains a mix of vertical and horizontally different products. If volume-independent costs (for example, product-development costs) dominate, the firm portfolio exhibits only horizontal differentiation.; The third part examines the impact of component commonality. We assume that the products intersect with each other but not with the market boundary. This assumption allows us to focus on the tradeoff between cannibalization and cost saving. We found that the cost of quality has an indirect impact on feature differentiation and that the cost of feature differentiation has an indirect impact on quality.