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Now earlier this year, I wanted to buy a new printer.
I went to Amazon and typed in HP deskjet into the user interface.
Do you know how many printers I got? Easily enough printers to have a printer
for every day in the year. 1000 series, the 2000 series, the 3000 all
the way up to the 6000 series. Within the 3000 series, there was a 3050,
a 3054. Within the 3050's there was a 3050
all-in-one, a 3050 all-in-one-wireless. Who needs all these printers?
Contrast to this was the day of Henry Ford.
Good old Henry allegedly said that you can have any color of a car as long as it is
black. Now that apparently was not quite true.
There were variations of color. But when things got busy at Ford, they
loved to produce black cars. First, it helped them to just have one
type of a car on the production line. And second, it turns out that black paint
dries really, really quickly. In this module, we'll discuss why firms
like variety. Variety means offering choice for the
customer. We'll also discover that variety causes
disruptions in the flow of the operations. One reason for variety is based on fit.
Take shoe size as an example. You and I would differ in what size of
running shoes we would like to purchase. If the closer a running shoe company is
able to provide the shoes they offer to us to our desired shoe size, the more likely
they will be to make the deal. You see this here in the utility function.
You see how I as a customer, have one shoe size, or in this case, a t-shirt size that
I really like, and the more we move away from this ideal point, the unhappier I
will be. If you give me running shoe size seven, I
prefer no running shoe at all. Economists refer to such situations as
horizontal differentiation. If you have taken an econ course, you
might have heard of Hot Link City as a famous model of this.
Examples for horizontal differentiation are shoe sizes, or Tshirt sizes.
But, also such things as locations of stores, or opening hours as well as
departure times for planes or trains. Unlike horizontal differentiation,
vertical differentiation captures a product choice situation in which
everybody agrees what is good and what is not.
You and I disagree in our liking of a size twelve running shoe, but we agree that 128
gigabytes in our iPod is better than just having 64.
You notice vertical differentiation in the shape of a customer utility function over
the various product offerings. Everybody agrees that this is good, and
this side is not. The way everybody likes is the high end
version of the product. Customers still are heterogeneous, in
their ability and willingness to pay for the high end.
This still leads to some customers buying the low end version of the product, and
captures a form of price discrimination, or market segmentation.
The third form of variety is one where customers have a more complex utility
function over the product space. For example, I like Diet Coke.
I also like lemon juice. However, you would have to pay me to drink
Diet Coke with lemon. The utility function over the various
product offerings here has a consequence of that is record.
It has local optima and it is very hard to predict for the company where a specific
customer is going to be in his or her liking of the product.
Examples of this are situations where we're dealing with music, food or art.
These are very multidimensional utility functions in which it is very hard to
custom tailor a product to the specific needs of the consumer.
The only way, typically, to find out what works, is by trial and error, and seeing
what the consumer, actually chooses. Finding some variety to make money.
Fit based and taste based varieties used to cater to heterogeneous customers.
The closer we can come to an ideal choice for a particular customer, the higher of a
price can we charge. Performance based variety is used to
segment the market. We would like to separate those who really
value a particular performance dimension, and those who do not.
We can then charge higher prices to those who really appreciate that quality of
performance dimension. However, there are also other reasons for
variety. Consider the following examples.
Often times customers seek variety for its own sake.
Think about going out for lunch, a restaurant might hold a broad menu not to
just to appeal to many different customers who have different preferences for salads
or sandwiches. They might also attempt to capture more
business from the same customer. By offering the customer a choice the
customer can come repeatedly, maybe every day of the week, to the restaurant and not
eat the same salad every day. Variety is also used to avoid competition.
Consider a firm that sells power tools for example to home depot and to lloyds.
Most of these retailers would like to claim that they have very low prices, so a
firm might sell product 1234A, to lloyds, and an almost identical product 1234B, to
home depot, and then both of these companies can happily claim that they are
offering the lowest price. In this session, we have encountered
various types of product variety. We've also discussed why firms might be
providing variety to their customers. In the remainder of this module, we have
discussed the various cost of variety. In the first couple of sessions, we have
focused on the production related cost of variety, which would typically take the
forms of extra setup times and extra inventory.
We then talk about distribution related cost of variety.
And concludes the module from the customer's perspective.
As it will turn out, even the customer will not always wanna have too much
choice, because he might just be overwhelmed by the amount of choice that
we provide them.