Optimal Advertisement and Peripheral Product Line Design

We consider a firm’s joint advertisement and product line design problem where the customers have heterogeneous preferences for the product. In the first stage, the firm designs an advertisement that may reveal information about customers’ preferences to potential customers. After viewing the advertisement, the customer decides whether to enter the second stage. In the second stage, the firm designs a product line that provides different products, targeting customers with different valuations. We fully characterize the firm’s optimal information policy and product line design. We find that the optimal information policy is either no disclosure or partial disclosure, where only the low-value customer may receive a mixed signal. For the optimal product line design, the quality distortion is mitigated compared to that in the classical screening problem. Our results provide managerial implications for firms in jointly designing advertisements and product line.