Product Line Strategy Under Complementary Effects

In this research, we study a durable goods manufacturer’s product line strategy when the product interacts with those of a complementary industry. It is well known that the cannibalization between high- and low-end products can significantly lower durable goods manufacturers’ total profits. This is why, in general, a durable goods manufacturer would not introduce a low-end product if the low-end product cannot be produced at a lower cost than the higher-end product. However, when the durable product is involved in a complementary relationship with another market and when such a connection is sufficiently strong, companies have an incentive to expand their product line, even when the low-end version costs the same as that of the high-end. A broader product line is a credible commitment to higher future output, and thus encourages higher output from the complementary industry, which, in turn, boosts the demand for the durable good. Article was published in an open access journal.