The effect of risk aversion on product family design under uncertain consumer segments

A product family refers to a group of products that have been derived from a common product platform and which are specifically designed to satisfy a variety of market segments. In this paper, we consider a firm utilising product family design in order to respond to the requirements of two consumer segments, each characterised by different quality valuations. Although the total number of consumers in the market is known, the proportions each segment share are random, with known mean and variance. We show how the uncertainty of the market segmentation affects the firm's decision whether to use common rather than unique components. Motivated by a problem faced by a major automotive manufacturer, we study the consequence of low and high uncertainty, various product quality levels and the difference of marginal valuation on the best configuration.