A Model of Product Portfolio Design: Guiding Consumer Search through Brand Positioning

We investigate a firm’s optimal product portfolio design on a Hotelling line that can affect consumers’ search decisions. Consumers form their perceptions of a brand from interactions with all products in the portfolio. We conceptualize the average location of the products as the brand position that represents the aggregate information about characteris- tics common to the product portfolio. Then, we propose a mechanism for why and how brand positioning induced by a firm’s product portfolio design can deliver credible infor- mation that guides consumer search. We show that niche positioning naturally conveys more information than mainstream positioning. A mainstream brand has incentives to opportunistically dilute its brand by offering a wide range of products. Even in a monopo- listic market, a niche brand positioning may arise as an equilibrium because it serves as a commitment device that prevents brand dilution