Communication Strategies and Product Line Design

When selling a product line, a firm has to consider the costs of communicating about the different products to the consumers. This may affect the product line design in general, and which products or services are offered in particular. The problem is that firms have to communicate to consumers, possibly through advertising, to make them consider buying the products that firms are selling. This results in the firm offering a smaller number of products than is optimal when advertising has no costs. This effect is greater the extent of consumer confusion about the advertising messages, and is reduced by a greater ability to target advertising. When offering vertically differentiated products (second-degree price discrimination), under general conditions it is optimal to advertise so that one has a greater proportion of sales of a lower-quality product than if advertising had no cost. This situation also allows the firm to charge a lower price for the high-quality product and offer a higher quality of the low-quality product than it would if advertising were without cost.