Pii: S0022-4359(00)00048-8

Rapid changes in technology can have a sudden and differential impact on cost components of variants within product lines such as computers, printers, digital cameras and cellular phones. How should retailers react to such changes? We address this issue by answering three questions. First, when the costs of specific product components change (perhaps, precipitously), how should retailers adapt their prices in the affected product lines? Second, what will be the impact on profit margins, the range of prices and average price of the line? Finally, if a product variant is either added or removed from the line, how should the retailer adjust the other prices in the line? Our analysis reveals that the nature of interaction between the variants of the product line plays a central role in determining the appropriate retailer response to cost shocks. We also provide empirical support for our analysis. © 2001 by New York University. All rights reserved.