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. A 1000 series, a 2000 series, a 3000 all the way up to the 6000 series. Within the the 3000 series there was a 3050, a 3054. Within the 3050s there was a 3050 all-in-one, a 3050 all-in-one wireless. Who needs all these printers? Contrast this with 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 to the customer. We will 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. 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 tee-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 shoes size seven, I prefer no running shoes at all. The economist refer to such situations as horizontal differentiation. If you have taken an Econ course you might have heard of Hotelling's city as a famous model of this. Examples for horizontal differentiation are shoe sizes or t-shirt sizes. But also things such as locations of stores or opening hours, as well as departure times for planes and for trains. Unlike, horizontal differentiation, vertical differentiation can search the product choice situation, in which everybody agrees what is good and what it not. You and I disagree in our liking of the size 12 running shoe. But we agreed 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. Though everybody likes 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 versions of the product and captures the 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 will have to pay me to drink diet coke with lemon. The utility function over the various product offerings here. As a consequence of that it has local optima, and it is very hard to predict what the company or a specific customer is going to be in his our 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 which are just very hard to custom tailor a product to the specific needs of a consumer. The only way, typically, to find out what works is by trial and error and seeing what the consumer actually chooses. Firms have a 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 appeal to different customers who have different preferences for salads or sandwiches, they may also attempt to capture more business from the same customer. Through offering the customer a choice, the customer can come repeatedly, even 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 Lowes. Most of these retailers would like to claim that they have very low prices. So a firm might sell product 1234A to Lowes, 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 forms of product variety. We've also discussed why firms might be providing variety to their customer. In the remainder of this module we'll discuss the various costs of variety. In the first couple of sessions, we'll focus on the production related cost of variety which will typically take the forms of extra setup times and extra inventory. We'll then talk about distribution related cost of variety. It concludes the module from the customers perspective. As it will turn out, even the customer will not always want to have too much choice because it might just be overwhelmed by the amount of choice it will provide them.
