A Dynamic Model of Repositioning

Consumer preferences change through time and rms have to adjust their product positioning for their products to continue to be appealing to consumers. These changes in product positioning require xed investments such that rms engage in these repositionings only once in a while. We construct a model that can include both predictable and unpredictable consumer preference changes, and where a rm optimally repositions its product given the current market conditions, and expected future repositionings. When unpreditable consumer preferences are evolving away from a current rm's positioning, the decision to reposition is like exercising an option to be closer to the current consumer preferences, or wait to reposition later or for the consumer preferences to return to closer to the current rm's positioning. We can characterize the optimal repositioning strategy, how it depends on the discount factor, variance of preferences, and costs of repositioning. We compare the optimal policy of the rm with what could be optimal from a social welfare point of view, and nd that the rm repositions more frequently than what be e cient. With predictable changes of consumer preferences, the optimal repositioning strategy involves overshooting, and asymmetric repositioning thresholds.