Should Designers Worry About Market Systems?

Engineering approaches for optimizing designs within a market context generally take the perspective of a single producer, asking what design and price point will maximize producer profit predicted by consumer choice simulations. These approaches treat competitors and retailers as fixed or nonexistent, and they take business-oriented details, such as the structure of distribution channels, as separate issues that can be addressed post hoc by other disciplines. It is well established that the structure of market systems influences optimal product pricing. In this paper, we investigate whether two types of these structures also influence optimal product design decisions; specifically, 1) consumer heterogeneity and 2) distribution channels. We first model firms as players in a profit-seeking game that compete on product attributes and prices. We then model the interactions of manufacturers and retailers in Nash competition under alternative market structures and compare the equilibrium conditions for each case. We find that when consumers are modeled as homogeneous in their preferences, optimal design can be decoupled from the game, and design decisions can be made without regard to price, competition, or channel structure. However, when consumer preferences are heterogeneous, the behavior of competitors and retailers is key to determining which designs are profitable. We examine the extent of this effect in a vehicle design case study from the literature and find that the presence of heterogeneity leads different market structures to imply significantly different profit-maximizing designs.