Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 20

A practical application of utility theory is in the field of marketing. Firms that wish to develop a new product that will appeal to consumers must provide the good with attributes that successfully differentiate it from its competitors. A careful positioning of the good that takes account of both consumers' desires and the costs associated with product attributes can make the difference between a profitable and an unprofitable product introduction.
Graphic Analysis
Consider, for example, the case of breakfast cereals. Suppose only two attributes matter to consumers-taste and crunchiness (shown on the axes of Figure 1). Utility increases for movements in the northeast direction on this graph. Suppose that a new breakfast cereal has two competitors-Brand X and Brand Y. The marketing expert's problem is to position the new brand in such a way that it provides more utility to the consumer than does Brand X or Brand Y, while keeping the new cereal's production costs competitive. If marketing surveys suggest that the typical consumer's indifference curve resembles U1, this can be accomplished by positioning the new brand at, say, point Z
Introduction of the iPad
Apple's introduction of the iPad in 2010 (and the iPad2 in 2011) represents one of the most successful marketing efforts in history. Suppose that consumers of portable computing equipment value two characteristics: (1) portability and (2) comprehensiveness. Prior to the iPad's introduction, such consumers had two
polar choices. They could choose large and relatively bulky laptop computers that provided comprehensive computer applications but were hard to lug around. Or consumers could choose smartphones that were easy to carry, but had small screens and offered a limited number of applications. The iPad fits neatly between these two options. It was relatively portable (especially since it could be connected to cell phone networks), it had a large screen, and, in short order, it offered thousands of nice applications. The tablet computer was an immediate success selling 300,000 units on its first day and over 50 million in the next two years. Clearly, the product was well positioned.
Subway
With about 35,000 outlets worldwide, Subway (whose main product is, naturally enough, submarine sandwiches) is the largest restaurant chain in the world. The company's growth in the last 15 years has far eclipsed its older rivals, McDonalds and Burger King. This success is, in part, attributable to changing consumer valuation of the characteristics of fast-food franchises. Again, a two-characteristic illustration should suffice. When thinking about eating at a fast-food restaurant, suppose consumers value two characteristics: (1) speed of service and (2) quality of food. Although Subway usually cannot meet the speed of service promised by McDonalds, it has benefited significantly from a change in consumer attitudes toward quality. Specifically,
Subway's "Eat Fresh" slogan together with its large assortment of vegetable toppings has led many consumers to believe it offers more healthy fare than the traditional burger emporium. By positioning itself between the major burger franchises and conventional sit-down restaurants, Subway has managed to provide utility improving choices for many consumers.
Automobile manufacturers provide "options packages" to their buyers. Most offer relatively few specific packages, each of which offers a pre-defined set of added accessories. For example, an "interior package" may include leather seating, enhanced interior trim, special sound or video systems, and additional motor-controlled seats. Why do auto companies provide their options in packages rather than allowing consumers to choose whatever specific options each person wants?