Product‐Line Length as a Competitive Tool

The increasing number of consumer goods and services offered in recent years suggests that product‐line extensions have become a favored strategy of product managers. A larger assortment, it is often argued, keeps customers loyal and allows firms to charge higher prices. There is disagreement, however, about the extent to which a longer product line translates into higher profits. We develop an econometric model derived from a game‐theoretic perspective that explicitly considers firms' use of product‐line length as a competitive tool. On the demand side, we analytically establish the link between consumer choice and the length of the product line. Based on our derivations, we include a measure of line length in the utility function to investigate consumer preference for variety using a brand‐level discrete‐choice model. The supply side is characterized by price and line length competition between oligopolistic firms. For the empirical analysis we use market‐level data for the yogurt category. We find that there are decreasing returns to product‐line length. Based on a series of “what‐if” experiments, we derive recommendations for effective product line decisions in a competitive environment.