Product Line Design with Gift Buyers

This paper considers the optimal design of a product line for a manufacturer that faces gift buyers who make purchases for other consumers' consumption, and regular buyers who make purchases for their own consumption. Assuming that a gift buyer has imperfect knowledge about the gift receiver's preference and end users differ in their valuations to quality, we show that in the presence of gift buyers, (i) the manufacturer will not serve the gift buyers with the highest-quality product item; (ii) the manufacturer may offer a full line of gift items, may serve all gift buyers with one single gift item, or may simply induce gift buyers to buy regular products as gifts; (iii) the presence of gift buyers affects the manufacturer's optimal pricing and product-line decisions, which in turn affects the regular buyers' welfare. In an extended model of the paper, we also consider the case where there exist some gift buyers who are very concerned about whether the quality of gifts meets receivers' expectation and are infinitely risk averse. We find that in this case the increase in the population of infinitely risk averse makes it more likely that the firm focuses on the high-end regular buyers and the infinitely risk averse gift buyers by offering them the same high-end product.