Article

Pricing for a Durable-Goods Monopolist Under Rapid Sequential Innovation

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Abstract

A durable-goods monopolist who will be introducing new and improved versions of his product must decide how to price his products, keeping in mind the relative attractiveness of the current and future products. Dhebar (1994) has shown that if technology is changing too quickly and the producer cannot credibly commit to future prices and quality, then no equilibrium strategy exists. That is, there is no credible strategy for the future product that the producer can commit to in the first period. We show that an equilibrium pricing strategy exists if the monopolist does not offer upgrade pricing, that is, special pricing to consumers who have bought an earlier version. The author shows the possible purchase patterns in equilibrium and derives the optimal pricing strategy.

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... Unfortunately, prior literature has documented that consumers show little enthusiasm for frequently buying new product generations (Heidenreich and Handrich, 2015;Mani and Chouk, 2017). This situation appears to result from the fact that consumers regularly face the dilemma of whether to buy a new product with the latest technology at the time of market introduction or to intentionally postpone their adoption until a subsequent new product -with possibly even greater technological advancements-is available (e.g., see Kornish, 2001;Shih and Schau, 2011). The latter option is commonly referred to as "leapfrogging," describing a consumer's decision to reject a new product and instead wait for a superior subsequent product generation (Talke and Heidenreich, 2014). ...
... While the impact of leapfrogging on the success of new products and even the long-term survival of companies has been acknowledged (Kornish, 2001;Peres et al., 2010), only a few studies have been conducted that investigate the nature and potential causes of consumer leapfrogging behavior (Peres et al., 2010). Accordingly, empirical insights into psychological processes underlying this behavioral response to new products are lacking. ...
... With regard to the first category, the included studies focused on research fields adjacent to consumer adoption behavior rather than on leapfrogging itself, but based on their findings, some conceptual or empirical evidence for the occurrence of consumer leapfrogging behavior was found. For instance, Kornish (2001) investigated pricing strategies for durable goods among monopolists and showed that the adoption of a product could be delayed and product generations could be skipped. In reference to Fudenberg and Tirole (1998), she called this behavior leapfrogging. ...
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In times of rapid technological advancements, consumers often reject new products as they intentionally postpone their adoption until significant technology improvements are available. This phenomenon is commonly called consumer leapfrogging behavior. While previous studies have found vast empirical evidence for the occurrence and detrimental effects of such behavior, only a few studies have focused on investigating the nature and determinants of consumer leapfrogging. Hence, this article systematically explores and empirically validates potential determinants of consumer leapfrogging behavior by applying a multimethod approach. First, we conducted a systematic literature review to summarize the current research. Second, we applied a qualitative study to identify potential reasons for consumer leapfrogging behavior. The results show that known theoretical rationales for innovation rejection behavior tied to active and passive innovation resistance do not comprehensively account for the complex psychological processes of this behavior. Consequently, we introduce a new construct called “leap disposition” to explain consumers’ disposition to reject a new product and instead wait for a superior subsequent product generation. Third, we empirically validate and quantify the relative importance of both established constructs (i.e., active and passive innovation resistance), as well as the newly introduced leap disposition, for leapfrogging behavior within a large-scale study.
... Another facet of the consumer problem in buying technology-intensive products is the time value of availability. Given the fast technological improvement, consumers face a "buy or wait" decision problem (Kornish, 2001). Briefly, they have to decide whether to buy the currently available product, or to wait for the improved product available in the future. ...
... Below, we follow Kornish's systematic approach to obtain equilibrium. Kornish (2001) considers selling one generation in each period, that is, only Generation 1 is available in Period I, and only Generation 2 is sold in Period II. However, in many cases, manufacturers of technology-intensive products continue selling the first generation along with the new and improved generation. ...
... The firm introduces a new and improved product, Generation 2, and sells it along with Generation 1 in Period II. The model follows Kornish's (2001) formulation in order to find equilibrium. The difference between our model and Kornish's is that we allow both generations to be sold in Period II which is a more realistic setting that reflects the current markets of high-technology goods such as microprocessors. ...
Article
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Journal of Academy of Business and Economics, 2008, 8(2), 100-113. This study investigates the issue of pricing and innovation for technology-intensive products when there are overlapping introductions of successive generations with rapid technological improvements. The goal of the research is to discover the optimal pricing strategy focusing on the relationship between the prices of old and new generations, the quality improvement between the two generations, and the length of introduction intervals. Our model is distinguished from the prior work by capturing two important features of high-tech product markets with sequentially introduced generations. First, the consumers make inter-temporal purchase decisions on whether and when to participate in the market at each introduction. Second, the manufacturer’s profit depends not only on the sales of the new generation but also on the sales of the old generation products still in the market. We found three possible equilibria and identified the one that a high-tech manufacturer would choose in the real world based on current market parameters. In this equilibrium, the manufacturer chooses a strategy that makes the older generation attractive to consumers, which means the firm chooses to protect the older generation products from cannibalization by the new generation. Another characteristic of this equilibrium strategy is that the introduction price of the new generation increases with the quality improvement between the old and new generations but decreases with the length of the interval between two introductions. Thus, the manufacturer has an incentive to increase the price of the new generation product with higher consumer willingness to pay when the quality improvement raises consumers’ perceived obsolescence in the older generation, and when consumers’ cost of waiting is reduced by a quick arrival of the new generation. Empirical support for the theoretical result is provided using Intel microprocessor pricing and quality data. The findings of this research can be applied as a useful pricing decision tool for various technology-intensive products such as computer hardware and software.
... Our paper is also related to the literature on sequential innovation. Our model builds on those in Dhebar (1994) and Kornish (2001), which examine the problem of a durable-goods monopolist selling lowquality and high-quality products in the first and second period, respectively. They examine whether there exists an equilibrium pricing strategy when the pace of quality improvement varies. ...
... They examine whether there exists an equilibrium pricing strategy when the pace of quality improvement varies. Dhebar (1994) concludes that rapid quality improvement is not desirable even with the option of upgrading the lowquality products, whereas Kornish (2001) shows that any large quality improvement could be optimal under different parameter settings without offering the special upgrading pricing in the second period. Bhattacharya et al. (2003) investigate how to optimally introduce high technology products with an option of holding the low quality products until the high quality products launch. ...
... h L1 Þ denotes the valuation of the buyer who has purchased the low-quality product and is indifferent about whether to upgrade to the high-quality version in Period 2; h k H ð \ h L1 Þ denotes the buyer who is indifferent between purchasing the high-and low-quality products in Period 2; and h k L2 ð h k H Þ denotes the buyer who is indifferent between purchasing the low-quality product and nothing in Period 2 ( Figure 1). As suggested in the literature on sequential innovation (Dhebar 1994, Kornish 2001, the indifferent buyers h L1 , h k U , h k H , and h k L2 must satisfy: ...
Article
Full-text available
Two‐sided platforms are often coupled with exclusive hardware products that connect two sides of users, the consumers of the hardware product (i.e., buyers) and the application developers (i.e., sellers). The hardware product in the platform business model introduces three important issues that are not yet well understood in the literature of platform pricing: potentially downward‐trending production cost, product quality improvements, and consumers' strategic behaviors. Using analytical modeling, our study explicitly factors in these issues in analyzing a monopoly platform owner's two‐sided pricing problem. The platform sequentially introduces and prices quality‐improving hardware products, for which the costliness of quality may decrease. Strategic buyers make purchasing and upgrading decisions, which dynamically determines the buyer‐side network size. Meanwhile, the seller‐side network size is determined endogenously. We find that, an increase in the likelihood or magnitude of future costliness reduction raises the initial buyer‐side price of the low‐quality product and lowers the seller‐side fee. This strategy, in turn, creates an indirect intertemporal effect that allows the platform to also raise the buyer‐side price(s) of the product(s) sold later. These findings contrast with conventional wisdom and provide an economic explanation for premium introductory pricing of many platform products. Moreover, we find that strengthening the network effect can result in more pronounced increases in the buyer‐side prices.
... Our paper is also related to the literature on sequential innovation. Our model builds on those in Dhebar (1994) and Kornish (2001), which examine the problem of a durable-goods monopolist selling low-quality and high-quality products in the first and second period, respectively. They examine whether there exists an equilibrium pricing strategy when the pace of quality improvement varies. ...
... They examine whether there exists an equilibrium pricing strategy when the pace of quality improvement varies. Dhebar (1994) concludes that rapid quality improvement is not desirable even with the option of upgrading the low-quality products, whereas Kornish (2001) shows that any large quality improvement could be optimal under different parameter settings without offering the special upgrading pricing in the second period. Bhattacharya et al. (2003) investigate how to optimally introduce high technology products with an option of holding the low quality products until the high quality products launch. ...
... θ k U (≥ θ L1 ) denotes the valuation of the buyer who has purchased the low-quality product and is indifferent about whether to upgrade to the high-quality version in Period 2; θ k H (< θ L1 ) denotes the buyer who is indifferent between purchasing the high-and low-quality products in Period 2; and θ k L2 (≤ θ k H ) denotes the buyer who is indifferent between purchasing the low-quality product and nothing in Period 2 ( Figure 1). As suggested in the literature on sequential innovation (Dhebar 1994, Kornish 2001, the indifferent buyers θ L1 , θ k U , θ k H , and θ k L2 must satisfy: ...
Article
Two-sided platforms are often coupled with exclusive hardware products that connect two sides of users, the consumers of the hardware product (i.e., buyers) and the application developers (i.e., sellers). The hardware product in the platform business model introduces three important issues that are not yet well understood in the literature of platform pricing: potentially downward-trending production cost, product quality improvements, and consumers' strategic behaviors. Using analytical modeling, our study explicitly factors in these issues in analyzing a monopoly platform owner's two-sided pricing problem. The platform sequentially introduces and prices quality-improving hardware products, for which the costliness of quality may decrease. Strategic buyers make purchasing and upgrading decisions, which dynamically determines the buyer-side network size. Meanwhile, the seller-side network size is determined endogenously. We find that, an increase in the likelihood or magnitude of future costliness reduction raises the initial buyer-side price of the low-quality product and lowers the seller-side fee. This strategy, in turn, creates an indirect intertemporal effect that allows the platform to also raise the buyer-side price(s) of the product(s) sold later. These findings contrast with conventional wisdom and provide an economic explanation for premium introductory pricing of many platform products. Moreover, we find that strengthening the network effect can result in more pronounced increases in the buyer-side prices.
... Despite the significance of the mobile app industry in terms of size, scope and potential 3 , mobile app development has received little attention in the existing operations management literature. While sequential innovation has been studied in other technology-based industries such as industrial products or consumer electronics (Bessen and Maskin 2009, Kornish 2001, Ramachandran and Krishnan 2008, Krishnan and Ramachandran 2011, novel characteristics of the mobile application development call for new scholarly attention. In addition, the availability of highly granular data for successive versions of mobile apps over time as well as corresponding market data allows us to link and empirically investigate sequential innovation efforts with market performance. ...
... In order to minimize the cost incurred by the customer in keeping up with new technology, firms design their products to be "modularly upgradeable" (Ramachandran and Krishnan 2008), allowing customers to select the desired components for upgrade which might also potentially reduce waste (McDonough and Braungart 2002). A stream of literature has studied the decisions made by firms while managing rapid sequential innovation through modular upgradability, such as those related to product design (Ramachandran and Krishnan 2008), release timing, and pricing (Kornish 2001), and while assessing the appropriateness of modular upgradability for different types of markets and products (Krishnan and Ramachandran 2011), mostly by using analytical models. ...
Article
Problem definition: In today’s highly dynamic and competitive app markets, a significant portion of development takes place after the initial product launch via the addition of new features and the enhancement of existing products. In managing the sequential innovation process in mobile app development, two key operational questions arise. (i) What features and attributes should be added to existing products in successive versions? (ii) How should these features and attributes be implemented for greater market success? We investigate the implications of three different types of mobile app development activities on market performance. Academic/practical relevance: Our study contributes to the operations management literature by providing an empirically based understanding of sequential innovation and its market performance implications in mobile app development, an important industry in terms of size, scope and potential. Methodology: Using a novel data set of mobile apps in the Productivity category, we leverage text-mining and information retrieval techniques to study the rich information in the release notes of apps. We then characterize product development activities at each version release and link these activities with app performance in a dynamic estimation model. We also incorporate an instrumental variables analysis to substantiate our findings. Results: We find that greater update dissimilarity (i.e., dissimilarity of the features and attributes of a new update from those of previous updates) is associated with higher performance, especially in mature apps. We also find that the greater the product update market orientation (i.e., the greater the similarity of the focal firm’s new features and attributes with respect to the recent additions of its competitors), the higher is the market performance. This finding suggests that the market rewards those developers who have a responsive policy to their competitors’ product innovation efforts. Our results also suggest that a rapid introduction of updates dampens the potential market benefits that the mobile app developers might gain from market orientation. We find no evidence of a beneficial effect of product update scope (i.e., incorporating features and attributes from other product subcategories) on market performance. Managerial implications: Our study offers managerial insights into mobile app development by exploring the sequential innovation characteristics that are associated with greater market success in pursuing and implementing new features and attributes.
... Literatürde bu müşteriler miyop müşteri olarak adlandırılır.Talep yönlü yaklaşımlar müşteri davranışlarının yeni ürün piyasaya sunma kararlarına olan etkilerini ele alır. Bu alandaki ilk çalışmalar olanDhebar (1994) veKornish (2001) ilk dönemde alt segmente, ikinci dönemde üst segmente hitap eden ürünler satan tekel bir şirketi ele almışlardır. Bu iki çalışma ikinci dönemde sunulan ürünün performans değerine göre denge fiyatlarını incelemiştir.Dhebar (1994) hızlı performans artışı yapıldığında firma ve müşteriler arasında fiyat dengesinin elde edilemeyeceğini vurgulamaktadır.Kornish (2001) ise ikinci dönemde müşterilere performans artışı için özel fiyatlar önerilmediğinde fiyat dengesinin sağlanabileceğini göstermiştir.Liang ve diğ. ...
... ilk dönemde alt segmente, ikinci dönemde üst segmente hitap eden ürünler satan tekel bir şirketi ele almışlardır. Bu iki çalışma ikinci dönemde sunulan ürünün performans değerine göre denge fiyatlarını incelemiştir.Dhebar (1994) hızlı performans artışı yapıldığında firma ve müşteriler arasında fiyat dengesinin elde edilemeyeceğini vurgulamaktadır.Kornish (2001) ise ikinci dönemde müşterilere performans artışı için özel fiyatlar önerilmediğinde fiyat dengesinin sağlanabileceğini göstermiştir.Liang ve diğ. (2014) müşterilerin satın alma kararlarını erteleyebildiği durumda tek ürünlü ve çift ürünlü yeni ürün geçiş stratejilerini incelemiştir. Bu çalışmada planlama ufku iki dönemdir ve ürün geçişl ...
Article
Bilgisayar, akıllı telefon ve tablet gibi ürünleri içeren yüksek teknoloji sektörü dinamik bir yapıya sahiptir. Müşteri beklentileri hızla değişmekte ve gelişen teknoloji ile yeni ürünler piyasaya sunulmaktadır. Bu çalışma, bir yüksek teknoloji firmasındaki yeni ürünü piyasaya sunma zamanı, eski ürünü piyasadan kaldırma zamanı ve performans iyileştirme kararlarını ele almaktadır. Firma, farklı müşteri segmentleri için farklı performansı olan ürünler sunmaktadır. Müşteriler gelecek dönemlerde ürünün performansında iyileşme beklemektedir ve bu beklenti nedeniyle ürünü satın almayı erteleyebilmektedir. Sonsuz bir planlama ufkunda firmanın toplam karını en büyükleyen yeni ürün piyasaya sunma çevrimini bulmak için dinamik programlama modeli geliştirilmiştir. Dinamik programlama modeli ile müşterilerin erteleme davranışı dikkate alınarak her dönemin sonunda ürünlerin performansı ile ilgili üç karardan biri seçilir: (i) ürünlerin performansında iyileştirme yapılmaz, (ii) ürünlerin performansında küçük çaplı iyileştirme yapılır, ve (iii) ürünlerin performansında büyük çaplı iyileştirme yapılır. Önerilen modelin etkinliği bilgisayar sektöründe faaliyet gösteren bir firmada gösterilmiştir. Yapılan analiz sonucunda, firmanın müşterilerin beklenti düzeyini ve erteleme davranışını dikkate alarak yeni ürün piyasaya sunma çevrimini belirlemesi gerektiği tespit edilmiştir. Bu unsurlar göz ardı edildiğinde, firmanın toplam karında %3,8 oranında azalma olmaktadır. Ayrıca, yeni ürün piyasaya sunma çevriminin iyileştirme maliyeti ve paranın zaman değerine karşı duyarlı olduğu belirlenmiştir.
... Product innovation/quality decisions over time in the presence of strategic customers have been studied in the marketing and economics literatures (Dhebar 1994, Fudenberg and Tirole 1998, Fishman and Rob 2000, Kornish 2001. We refer to Shane and Ulrich (2004) for a detailed review of innovation and product development. ...
... We assume that there is no second-hand market as in Dhebar (1994), Lee and Lee (1998), and Kornish (2001). This assumption holds in the cases in which regulations do not allow second-hand products to be re-sold or when a …rm makes the product not salable in second-hand markets. ...
Article
We study a monopolistic firm which introduces two product versions sequentially in two periods. We analyze and compare the firm's decisions on the innovation level of the new version, the production quantities and prices of both versions, and the associated profit in four settings: when the customers are myopic or strategic in period 1 and whether the leftover inventory of the old version is phased out from the market (single rollover strategy) or is sold in the market (dual rollover strategy). In period 2, newcomers who wish to buy the new version arrive in the market. We show that the firm can improve both its profit and its innovation level by adopting an appropriate rollover strategy when selling to strategic customers. This finding underscores the importance of choosing a rollover strategy. Interestingly and differently from the existing literature, we see that strategic waiting behavior can accelerate innovation. These analytical insights remain largely valid when some of the customers who cannot get the old version due to a stockout leave the market before the new version arrives, or when some of the newcomers are interested in the new version as well as the leftover old version. This article is protected by copyright. All rights reserved.
... The firm follows dual rollover strategy, where V 2 is available for sale at price 2 in period 2 and V 1 is available for sale at price 1 in period 1 at a discounted price We assume that V 1 and V 2 are of the same marginal production cost, which is a common assumption for high-tech products (e.g., Liang et al. [26], Ray et al. [38]). Without loss of generality, we set the marginal cost to be zero (e.g., Bala and Carr [3], Kornish [21]). The innovation level of V 1 and V 2 are 1 and 1 + , respectively, where (0 ≤ ≤ 1) is the innovation incremental value of V 2 compared to V 1 [26]. ...
... Consumer"s surplus in period 2 will be discounted by (0 ≤ ≤ 1). In our model, captures not only the opportunity cost of postponed purchasing [21,47], but also how strategic consumers are, i.e., = 0 represents myopic consumers (e.g., Cachon and Swinney [8], Papanastasiou and Savva [35], Shum et al. ...
Article
Many innovating firms use trade-in programs to encourage consumers’ repeat purchasing. They can choose between dynamic pricing and preannounced pricing strategies to mitigate the impacts of consumers’ strategic behavior. This paper develops a dynamic game framework to explore the optimal pricing strategy when the firm sequentially introduces new generations of products to a market populated by strategic consumers with trade-in option offered. Results show that under either pricing strategy, the firm has an incentive to sell the old generation products to new consumers in the second period if the salvage value of the old generation product is high enough. When consumers are sufficiently strategic, if both the innovation incremental value of the new generation product and the salvage value of the old generation product are low enough, the firm is better off following the preannounced pricing strategy. Besides, as the firm becomes more farsighted, the comparatively dominant position of preannounced pricing over dynamic pricing disappears gradually.
... The surplus of strategic consumers in period 2 is discounted by a discount factor δ ∈ ½0; 1 (Liu and Zhang, 2013). Generally, δ captures the opportunity cost of the postponed purchasing (Kornish, 2001). In period 2, the replacement consumers, including both the myopic and strategic customers who have bought G 1 , will determine their participation in the trade-in program, and the strategic customers who have not purchased G 1 will determine the buying of G 2 . ...
Article
Full-text available
Purpose This paper investigates the dynamic pricing strategy of a firm for the successive-generation products under the conditions of the limited trade-in duration and strategic customers. Further, it explores the effect of a limited trade-in duration on the choice of the myopic and strategic customers, besides the optimal dynamic pricing and trade-in strategy of the firm. Design/methodology/approach Based on the choice behavior of the myopic and strategic customers, the authors have developed a two-period game-theoretic analytical model to decide the optimal retail prices of the successive-generation products and the optimal trade-in rebate when the firm adopts a dynamic pricing strategy and then investigate three extensions of the basic model to discuss the change in the results owing to the relaxation of certain conditions. Findings The authors find from the results that, in terms of profit maximization, it is better to extend the limited trade-in duration, and hence, the firm should implement a dynamic pricing strategy. However, in the situation of using a static pricing strategy, the firm should extend the limited trade-in duration only if the incremental value of the new generation products is below a certain threshold. Moreover, the firm should use a dual rollover strategy instead of a single rollover one. If all customers in the market are myopic, then the firm should also extend the limited trade-in duration. Research limitations/implications This study mainly discusses the impact of limited trade-in duration on the firm's dynamic pricing strategy when facing strategic customers, which provides several directions for future research. First, if the government offers subsidies to consumers, how will strategic consumers make purchase decisions? How would the enterprise make its pricing decision? Second, when asymmetric information exists between consumers and firms, how will it affect consumers' choice behavior and firms' pricing decisions? All these issues are worth exploring in the future. Practical implications These results offer certain managerial insights for the firm in the decision making on pricing within the trade-in program. Originality/value This is the first work to study the dynamic pricing strategy of the firm for the successive-generation products under the conditions of the limited trade-in duration and strategic customers. Further, this work discusses the changes in results owing to the relaxation of certain conditions.
... The resource-allocation as well as launchtiming decisions are also important while planning successive versions of products Kavadias 2002, Kavadias andLoch 2003). For example, the launch timing of successive products depends on the interdependence between these products (Morgan et al. 2001), customer expectations of future improved versions (e.g., Moorthy and Png 1992, Dhebar 1994, Kornish 2001, Krishnan and Ramachandran 2011, and product architecture (Ramachandran and Krishnan 2008). Recently, Lobel et al. (2016) characterized the optimal launch policy for successive generations of a product when consumers are strategic. ...
Article
Problem definition: Firms developing novel and innovative products regularly face a canonical product development and introduction problem: introduce a proven and immediately available product or delay product introduction until the successful development of an advanced version. Academic/practical relevance: Limited access to resources for the development of an advanced version adds another wrinkle to this problem, particularly for cash-constrained start-ups. For such start-ups, the introduction of an on-hand product can generate additional funds to support the development of an advanced product. However, the lower performance of the on-hand product can negatively impact the perception of the firm’s future products and lower future profitability. Methodology: We study the trade-off between revenues that an on-hand product generates for research and development funding and the negative effect it has on future profits. We characterize the optimal introduction timing of the on-hand product as a function of the financial resource constraints, the interdependence between these sequential products and the cost of development. Results: We identify important differences between the optimal product introduction strategies of a start-up and an established firm. Specifically, although it is always optimal for an established firm to accelerate the launch of a better-quality on-hand product, a start-up might find it optimal to delay its launch. The impact of technological failure and different forms of learning on the optimal strategy of the start-up are also explored. We translate our analytical findings into a managerial framework and illustrate these results using examples from the pharmaceutical and medical devices industries.
... In durable goods literature, Dhebar [23], Fudenberg and Tirole [24], Kornish [25] investigate the pricing problem for sequential versions of the product, but neither of them analyzes pricing and ordering together. Jia and Zhang [26] consider the dynamic pricing and ordering decisions for a durable product with multiple generations in a supply chain with one manufacturer and one retailer. ...
Article
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Finding the correct pricing strategy for a product with multiple versions is an issue for retailers from various industries. In this paper, joint pricing and ordering problem is considered for a product that has two versions at each selling period. Two models, namely with or without the donation option, are analyzed and optimality conditions and monotonicity properties of the decision variables are characterized. When demands of products depend on prices of both versions, donating part of old product inventory would be more profitable for the retailer. Moreover, the donation model would result in less wasted inventory, contributing to sustainability and goals of green economy. Analytical results are supported with numerical analysis of a realistic case.
... If the firm does not pre-announce the second-period price, on the other hand, then a simultaneous release is always preferred. Employing a similar two-stage setting and assuming that the firm conducts a sequential release and does not pre-announce the second-period price, Kornish (2001) characterizes the optimal pricing when the consumers may buy both versions of the product. We refer to Chen and Chen (2015) for a review of the literature on contingent and pre-announced pricing of product versions. ...
... The papers McAfee and Wiseman (2008) and Montez (2013) analyze situations in which the outcome of the Coase conjecture (does not) occur in a single product generation problem. The pricing of two generations of a durable product is discussed for example in Dhebar (1994), Kornish (2001) and Li and Graves (2012). Şeref et al. (2016) consider the introduction and the pricing of two generations in a diffusion model. ...
Article
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The aim of the present paper is to analyze how firms that sell durable goods should optimally combine continuous-time operational level planning with discrete decision making. In particular, a firm has to continuously adapt its capacity investments and sales strategy, but only at certain times it will introduce a new version of the durable good to the market. The launch of a new generation of the product attracts new customers. However, in order to be able to produce the new version, production facilities need to be adapted leading to a decrease of available production capacities. We find that the price of a given generation of a product decreases over time. A firm should increase its production capacity most upon introduction of a new product. The stock of potential consumers is largest then so that the market is most profitable. The extent to which existing capacity can still be used in the production process for the next generation has a non-monotonic effect on the time when a new version of the product is introduced as well as on the capital stock level at that time.
... We assume V 1 and V 2 are of the same marginal production cost, which is a common assumption for high-tech products (e.g., Liang et al., 2014;Ray et al., 2005). Without loss of generality, we set the marginal cost to zero, which is appropriate for a product with a high R&D cost but low production cost (e.g., Kornish, 2001;Ramachandran, 2007;Bala and Carr, 2009). The innovation levels of V 1 and V 2 are 1 and 1 þ θ, where θ ð0 θ 1Þ represents the innovation incremental value of V 2 compared with V 1 (Liang et al., 2014). ...
Article
In high-tech and innovative industries, many firms make joint decisions on product rollover strategy and pricing scheme and offer trade-in programs under some circumstances to encourage repeated purchasing. This paper studies the interaction between product rollover strategy and pricing scheme with trade-in program offered, by proposing a two-period model incorporating market heterogeneity and consumers’ forward-looking behavior. The results show that for both single rollover and dual rollover, the firm is better off following price skimming when consumers are not strategic enough, and product salvage value is low compared to new product innovation level; otherwise, penetration pricing is preferable. For given pricing scheme, the firm’s optimal rollover strategy depends on product innovation level, salvage value, and how strategic the consumers are. Under either rollover strategy, the firm has no incentive to offer the trade-in program under the circumstances when product innovation level is low, product salvage value is extremely low or high, or consumers are not strategic enough.
... It is entirely possible that, if consumers expect a product to evolve rapidly in terms of quality, their anticipation can impair a vendor's ability to practice inter-temporal price discrimination, as an equilibrium becomes impossible to attain (Dhebar 1994). In such a scenario, an equilibrium can be reached only if the vendor precludes upgrade pricing, the strategy of charging a lower price to those who own an older version (Kornish 2001). Of course, the issue of whether upgrade pricing is optimal-or even feasible-is an intriguing question in itself and has also been rigorously examined (Bala and Carr 2009). ...
Article
We examine the commitment problem faced by a software vendor in ending critical support, in the presence of network security risks. When releasing a new version of a product, in order to drive up its demand, the vendor must cease supporting the old version. However, the vendor's ability to leverage the increased demand can be limited because of a commitment problem. For, when the demand increases and the vendor accordingly sets a higher price, many consumers might opt not to upgrade, creating a situation where stopping securityrelated support simply becomes too risky. To avoid this risk and any subsequent losses in reputation, the vendor can renege on its earlier decision to stop support. We show that this commitment problem hurts the vendor's profitability and find that the no-commitment equilibrium profit can surprisingly increase with the cost to extend support. Accordingly, we propose a commitment mechanism. Further, the consumer surplus may actually increase if the vendor desists from crossing the proverbial line in the sand and discontinues support as planned.
... Mikkola[10]pointed out four factors which influence performance of modular product: Components, Interfaces, Degree of Coupling and Substitutability. When product is Rapid Sequential Innovation, Kornish[11]found that market will be equilibrium, if monopoly doesn't use Upgrade Pricing. Ulrich[12]considered two kinds of product performance: Global Performance is that product performance is decided by all components; Local Performance is that product performance is decided by one or several components. ...
... Mikkola [10] pointed out four factors which influence performance of modular product: Components, Interfaces, Degree of Coupling and Substitutability. When product is Rapid Sequential Innovation, Kornish [11] found that market will be equilibrium, if monopoly doesn't use Upgrade Pricing. ...
... Mobile app updates in the mobile app industry are well known to most customers, and customers expect updated versions of products to arrive sequentially in the future. Prior literature shows that software ("mobile apps are considered as software running on mobile devices") updates, such as new or updated software versions, are considered as one type of sequential product innovation, especially in high-technology industry (Bala & Carr, 2009;Boudreau, 2012;Kornish, 2001). ...
... In these papers, the only reason to purchase early at a high price is the time value of money (i.e., discounting), which we ignore here. Other reasons for consumers to time their purchase that have been discussed in the literature include product availability (e.g., Su (2007), Elmaghraby et al. (2008), Aviv and Pazgal (2008) and Cachon and Swinney (2009)) and product innovation (e.g., Dhebar (1994) and Kornish (2001)). These papers differ from ours. ...
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It has been shown that a monopolist can use advance selling to increase profits. This paper documents that this may not hold when a firm faces competition. With advance selling a firm offers its service in an advance period, before consumers know their valuations for the firms’ services, or later on in a spot period, when consumers know their valuations. We identify two ways in which competition limits the effectiveness of advance selling. First, while a monopolist can sell to consumers with homogeneous preferences at a high price, this homogeneity intensifies price competition, which lowers profits. However, the firms may nevertheless find themselves in an equilibrium with advance selling. In this sense, advance selling is better described as a competitive necessity rather than as an advantageous tool to raise profits. Second, competition in the spot period is likely to lower spot period prices, thereby forcing firms to lower advance period prices, which is also not favorable to profits. Rational firms anticipate this and curtail or eliminate the use of advance selling. Thus, even though a monopolist fully exploits the practice of advance selling, rational firms facing competition either mitigate it or avoid it completely. The online appendix is available at https://doi.org/10.1287/mksc.2016.1006.
... Another stream of literature that is related to our environment is that of dynamic product design when firms do not have commitment power (see, for instance, Dhebar (1994), Fudenberg and Tirole (1998), Kornish (2001), Krishnan and Ramachandran (2011), and Sankaranarayanan (2007)). These papers all assume a durable good monopolist that can offer technological improvements or upgrades to the product in the future. ...
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This dissertation consists of two essays that investigate dynamic pricing and bundling strategies in subscription markets. In the first essay, we analyze the dynamic price discrimination strategies of a monopolist offering new services on a subscription basis. In subscription markets, the pricing policy can be based on customers’ past purchase behavior (behavioral price discrimination) and time of purchase (intertemporal price discrimination). In the presence of uncertainty regarding the value of new features and heterogeneity in consumer valuations of the existing features, we investigate the profits and rate of adoption of new technology that can be achieved with each pricing strategy. When the prior heterogeneity in consumer valuation of the existing features is relatively large, the monopolist can improve his profits by committing to ignore consumer past behavior and varying prices based only on time. We also study the role of commitment power of the monopolist to announce future prices and correlation in valuations of the new and existing features. In the second essay, we investigate the multi-product pricing strategies of a sequentially innovating monopolist introducing new services. The new service can either represent a new functionality not directly related to the existing service or an enhancement to the existing services. When the existing service is offered in multiple versions, the monopolist can sell the new service separately or bundle the new service with some or all versions of the primary service. We analyze two pricing strategies that represent the two extremes of a spectrum of bundling strategies that a monopolist offering such services can practice: Discriminative Bundling (DB) and Independent Pricing (IP). Using the discriminative bundling (DB) strategy, a service provider offering multiple versions of the primary service bundles the new service only with higher versions of the primary service while selling it separately to remaining customers. Using the independent pricing strategy (IP), the service provider offers the new service separately to all consumers including those buying lower and higher end versions. We find that the comparison of the two strategies in terms of profits depends on the nature of the new service and the general distribution of consumer valuations for the new and the primary services.
... Recently, Yenipazarli (2015) proposes a product growth function to determine the optimal price, advertising spending and warranty strategy of a firm launching a new product into the market. Other contributions to this area include Kornish (2001), which considers the pricing problem for two generations of a product based on the consumers' valuations for each generation, and Rubel (2013), which studies price skimming under stochastic competitive entries. Padmanabhan and Bass (1993) comment that 'the demand model used in [this] analysis assumes that the time of entry of the second product is determined exogenously', and that 'endogenous consideration of this issue would be a International Journal of Production Research 3 very worthwhile contribution to the literature'. ...
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When planning for the introduction of a stream of new products into the marketplace, managers must consider both the timing and dynamic pricing decisions to determine an appropriate entry strategy into the marketplace. Literature in new product development (NPD) typically addresses optimal timing and pricing decisions independently. We develop an analytical model of coordinated product timing and pricing decisions when there are two generations of a new product under consideration. Factors driving the timing and pricing decisions include the unit sales and cost relationships for each generation as well as NPD costs for introducing the next generation of products. We derive analytic results that characterise the optimal timing and pricing strategies for a single product rollover scenario. We analyse several numerical examples to illustrate the interplay between optimal pricing and time-to-market strategies under more general settings.
... This can result in a situation where there is no equilibrium strategy. Kornish (2001) points out that an equilibrium strategy exists if the monopolist does not offer upgrade pricing. Also, Subramaniam & Srinivasan (1998) demonstrate the role of an introductory product strategy to signal the trajectory of its cost curves to consumers. ...
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In this paper we examine the influence that indirect network effects have on a durable goods manufacturer’s distribution strategy to lease or sell her product. Previous research has identified that a durable goods manufacturer can mitigate the potential for its own opportunistic behavior with respect to consumers by leasing instead of selling its product. However, we show that leasing creates an opportunity for a durable goods manufacturer to exploit firms that generate indirect network benefits by providing complementary products. As a result, the durable goods manufacturer faces a trade-off between leasing, which mitigates its potential to exploit consumers, and selling, which mitigates its potential to exploit producers of complementary products. In this paper, we examine this trade-off and show how a durable goods manufacturer can use a combination of leasing and selling to balance its strategic commitment across both its own market as well as the complementary market. We also analyze the impact of leasing with an option- to-buy contracts under these situations. (complementary markets, selling versus leasing, leasing with an option-to-buy) The authors are listed in alphabetical order
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We study the optimal product upgrades and rollover strategies of a risk-averse firm that is uncertain about future demand. For this purpose, we develop a two-period model based on whether the firm makes upgrading investments and if so which product rollover (solo or dual) strategy it adopts. Analysis of the equilibrium outcomes shows that if the firm is moderately risk-averse, it is unprofitable to upgrade and therefore only sells the first-generation product over two periods. Otherwise, the firm benefits from upgrading investments. In this case, the (solo-) dual-rollover guarantees the maximum total payoff if the degree of risk aversion is (low) high. Our sensitivity analysis demonstrates that: (i) the dual-rollover strategy can be seen as a hedge against increased demand uncertainty; (ii) the firm has a higher likelihood of using the dual-rollover strategy as cannibalization intensifies or intertemporal demand spillovers increase; and (iii) a lower payoff discount rate generally discourages the firm from upgrading the product. In situations where upgrading investments happen, the optimal product rollover strategy is contingent upon the degree of risk aversion and the payoff discount rate.
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The emergence of new technology products brings systematic changes to the market, and appropriate responses to such changes are essential for the survival and success of firms. This study investigated producers' optimal new product introduction (and positioning) strategies in various situations that require different sets of decisions. Specifically, we considered the diffusion of hybrid electric vehicles and battery electric vehicles (BEVs) in the South Korean automotive market. A model incorporating the strategic, forward-looking behaviors of both producers and consumers was used to derive producer's optimal new product introduction plan based on long-term market forecasting. Then, we conducted simulation analyses to investigate the benefit of forward-looking planning and how optimal strategies change depending on the policy interventions and market entrance of the new producer. The results show that a forward-looking strategy could improve the market performance of new products by up to 40 % compared to the myopic strategy, and the plan adjustment of the incumbent in response to competition could reduce competition-related losses by up to 9 %. Finally, stronger policy intervention and new market competition will motivate producers to introduce more, less-expensive BEVs in their product portfolio. Such responses significantly expand the BEV market, which is also a socially desirable outcome.
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The phenomenon of ‘consumer leapfrogging’ represents a conscious shift of consumers’ purchase decision for an innovation to a future product generation, and results in lower-than-expected demand. As consumers skip product generations, new product diffusion for the initial innovation and corresponding company turnover is capped. While previous studies highlight the importance of consumer leapfrogging behaviour, effective marketing strategies to attenuate detrimental consequences are lacking. To close this research gap, this paper empirically tests the effectiveness of various marketing strategies (trade-in program, bonus program, money-back guarantee, and product bundles) as potential countermeasures to consumer leapfrogging via a scenario-based online experiment with a 5 (four marketing strategies and control group) × 2 (low/high radical product) between-subjects design. Our results reveal that trade-in and bonus programs as well as money-back guarantees are effective countermeasures to consumer leapfrogging behaviour. Furthermore, our findings also show that the effectiveness of the instruments decreases with the degree of product radicality.
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In a market with a technology provider and two competing manufacturers, we examine the provider's technology introduction strategy and the manufacturers’ product rollover strategies. Our main results show that, first, the provider sells the new technology to both manufacturers in the case of small-level technology improvement, and sells to only one of them otherwise. Specifically, under the niche strategy (i.e., the provider sells the new technology to only one manufacturer), the provider sells the new technology to the low-quality manufacturer in the case of moderate-level technology improvement; otherwise, the provider sells to the high-quality manufacturer. Interestingly, the provider's profit may decrease with increased technology improvement. Second, the manufacturers will remove the old version of the product from the market when adopting the new technology, as long as the quality of the new version of the product exceeds a critical threshold. Finally, if the provider has a limited production capacity and can only satisfy the demand of one manufacturer, the provider sells the new technology to the low-quality manufacturer when the technology improvement is moderate; otherwise, the provider sells to the high-quality manufacturer.
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We examine how online customer reviews for one generation of a product affect sales of another generation in the same product series. The main intriguing result is that previous generation valence has a positive impact on current generation sales; however, current generation valence has a negative impact on previous generation sales. The positive impact of previous generation valence becomes even stronger (1) as the uncertainty (standard deviation) in reviews for the current generation increases and (2) when the current generation valence is high. In contrast, it becomes weaker (1) as the uncertainty in reviews for the previous generation increases and (2) when the current generation has been on the market for a longer period of time. Other results are discussed. Our data consist of intergenerational pairs of point-and-shoot cameras on the largest online seller of such devices, Amazon.com. We estimate the current and previous generation models jointly, allowing for errors to be clustered at the daily and product levels. In addition, we address endogeneity concerns over the online word of mouth measures by using instrumental variables. This paper was accepted by Juanjuan Zhang, marketing.
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This study investigates the interplay between manufacturer encroachment and the manufacturer’s equal pricig strategy. Encroachment happens when a manufacturer opens up a direct channel to compete with a retailer’s traditional channel. The equal pricing strategy is that the manufacturer commits to setting a direct channel retail price that equals the price determined by the retailer in the traditional channel. We first consider the setting where one exclusive retailer sells products from a manufacturer that does not have the option of selling only through its direct channel. Our results show that the availability of the equal pricing commitment enhances the manufacturer’s incentive to encroach when the channel competition is intense and the encroachment cost is medium. Interestingly, the manufacturer’s equal pricing commitment always hurts the retailer even though it eliminates the price competition between the two channels. This is because the availability of the equal pricing commitment could motivate the manufacturer’s encroachment. Our analysis shows that the manufacturer’s equal pricing commitment always improves consumer surplus and sometimes improves the supply chain performance. However, when the retailer also sells a substitutable product from a different manufacturer or the manufacturer has the option of only direct selling, the equal pricing commitment sometimes benefits the retailer and sometimes reduces the consumer surplus.
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When releasing a new version of a durable product, a firm aims to attract new customers as well as persuade its existing customer base to upgrade. This is commonly achieved through a rollover strategy, which comprises the price of the new product as well as the decision to discontinue the sale of the existing product (solo rollover) or to sell the existing product at a discounted price (dual rollover). In this paper, we argue that the timing of the new product release is an important‐but commonly overlooked‐third lever in the design of a successful rollover strategy. The release timing influences the consumers' perception of obsolescence, by which an existing product is considered obsolete merely by reference to a new product. This reinforces the upgrading behavior of existing customers, but it also necessitates deep discounts of the existing product to keep its sale viable in a dual rollover. We analyze the impact of the release timing on solo and dual rollovers in markets for digital goods (i.e., where production costs are negligible) that are composed of naive and sophisticated consumers. Under the assumption that both the old and the new product would offer a similar utility if there was no perceived obsolescence, we show that in both markets a firm selecting the release times from a continuous timeline can induce sufficiently large parts of its existing customer base to upgrade so that a solo rollover is optimal. We also characterize the resulting market segmentation, and we offer managerial as well as policy advice.
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In this paper, we analyze the profitability of a selling and a leasing model by considering both software upgrades and different price discrimination strategies in a two-period model framework. Three price discrimination strategies are considered: inter-temporal, behavior-based, and a hybrid price discrimination strategy. We find that consumers’ inter-temporal purchase behaviors and a vendor's choice of price discrimination strategies make it possible for a selling model to be more profitable than a leasing model. More specifically, if the monopolist cannot commit to never using information about consumers’ past purchase behavior for price discrimination, the selling model is more profitable than the leasing model. We also find that if a selling model is adopted, the monopolist should choose the behavior-based price discrimination strategy with a reward for returning consumers; but if a leasing model is adopted, the monopolist should choose the inter-temporal price discrimination strategy with a rising price. We also extend our model to a duopoly market. Different from a monopoly case, we find that the selling model dominates the leasing model under the hybrid strategy, while these two models are equally profitable under the inter-temporal strategy. These findings provide new insights into the comparison of the selling and leasing models.
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Reseller contract and online marketplace contract are two typical supply chain contracts provided by Online retail platforms (ORPs) in online retailing. Manufacturers can either wholesale their products to an ORP using the traditional reseller contract or choose an agency selling contract to sell their products directly to consumers through an online marketplace provided by the ORP. Based on a game model, this paper studies the contract choice strategy for a monopoly manufacturer facing two competing downstream ORPs. The results show that the competition intensity between the ORPs and the order-fulfilment costs critically moderates the choice decision. Specifically, for a given competition intensity (level of order-fulfilment costs), with rising order-fulfilment costs (the downstream competition intensity), the preferred mode for the manufacturer switches from the pure online marketplace mode to the hybrid mode and then to the pure reseller mode. The intuition of this lies in the interaction of the transfer of the pricing rights and the responsibility for order fulfilment. Meanwhile, the conditions to ensure the dominant equilibrium in the competition of ORPs are analysed. Finally, we extend the basic model by relaxing the assumptions about the same proportion fee rate and the fixed order-fulfilment cost.
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Product innovation and service upgrades are effective measures for firms to improve their competitiveness. Considering the upgrading of the installed customers (IU), the upgrade strategy of a platform firm usually follows two principles, namely, the derived principle (i.e., the basic product still operates when the new derived product is released) or updated principle (i.e., the basic product stops operating when the new product is released). This study investigates whether an upgraded strategy considering IU is beneficial to the platform and which upgrade principle is preferred by platforms in a two-sided market. To explore the optimal upgrade strategy of a platform, we set up a monopoly model and propose three upgraded strategies: the traditional strategy (which does not consider IU), the updated strategy and the derived strategy. The updated strategy can be seen as a discrimination price between the installed and potential buyers. However, the derived strategy helps the platform to classify the buyers into low- and high-end ones. Compared to the traditional strategy, the platform will get higher commission profit and lower membership profit by using the strategies considering IU.
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Manufacturers of durable goods often buy back older versions of their products from customers to encourage them to switch to improved versions and to create control over product return streams in their closed‐loop systems. Classical models and conventional wisdom have long ignored that the framing of these buyback schemes, whether through trade‐ins or upgrades, can matter for theory. Using the reference‐point shift mechanism, we provide experimental evidence that the alternative frames are not equivalent and that the framing effect induces customers to change which prices they anchor to as their reference points for the price for their current version. We then use the experimental findings to extend a reference‐dependence version of the classical model of trade‐ins and upgrades and show how the behavioral extension modifies key predictions of the classical model and provides predictions more in line with today's durable goods markets.
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We analyze the problem of a firm that sells durable goods. In particular, we investigate how this firm optimally combines continuous-time operational-level planning (continuously deciding on capacity investment) with discrete decision making (when to launch a new generation of the product, how to price a particular generation of the product). We find that a firm should invest most into its production capacity just after the introduction of a new product. Then there is a large number of potential customers and thus a large production capacity is needed to fulfill demand. The extent to which existing capacity can still be used in the production process for the next generation has a non-monotonic effect on the optimal timing of launching a new generation as well as on its price. We show that the optimal price declines with each new product generation.
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Clean technology products (e.g., electric vehicles and solar photovoltaic panels) are key to sustainable development of sectors such as transportation and energy. Often, adoption of such products relies on development of supporting service infrastructure, for example, charging networks or energy-storage systems, and is often hindered by the “chicken-and-egg” dilemma: firms are reluctant to make capital-intensive investments before sufficient consumer adoption, and consumers hesitate to adopt without supporting infrastructure. Aiming to overcome this issue, the article examines the efficacy of two forms of government subsidies (as well as their combination), namely service infrastructure subsidy and product subsidy. Although both types of subsidies are generally conducive to clean-technology adoption, the study finds that these subsidies can be detrimental under certain conditions. In particular, the former may cause early adopters to delay their purchase, and the latter may interfere with the firm’s investment incentives and lead to reduced overall adoption. The article identifies the optimal subsidy strategy that follows a “sandwich rule:” it is optimal to provide only the product subsidy when the infrastructure deployment cost is sufficiently high or sufficiently low; however, it is optimal to subsidize both if the cost falls in the moderate range.
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Subscription commerce emerged as an up-and-coming phenomenon in retailing that enables shoppers to automatically receive recurring deliveries of consumer goods. One important dimension along which subscription services differ is the degree to which the content of each delivery is surprising. This paper focuses on two archetypes at opposite ends of this dimension, namely predefined and curated surprise subscriptions, and juxtaposes them to conceptualize surprise as a retail mechanism. It is hypothesized that curated surprise subscriptions carry an inherent risk to receive unappealing products, as consumers outsource the decision-making process to the subscription provider, which can influence consumers’ choices and attitudes. Three studies explore the role of risk perception in consumers’ evaluation of consumer goods subscriptions. First, it was found that consumers prefer shorter delivery intervals for predefined subscriptions and longer delivery intervals for curated surprise subscriptions, in line with Prospect Theory. Second, empirical evidence for perceived risk as a mediating variable in this relation is provided. Finally, it is shown how retailers can manipulate associated risk through the introduction of a free-return option. The article is concluded by introducing a new typology of subscription services and discussing implications for managerial practice as well as avenues for future research.
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Cloud services are transforming business and government at an ever-increasing rate. As a form of cloud service, software as a service (SaaS) is one of the fast growing segments of the information technology and has become an attractive alternative to the on-premises software. In this paper, we study the optimal pricing strategies of a cloud service provider in an incumbent-entrant setting under user upgrade cost and switching cost. Our results show that in equilibrium the market structure is not unique. The specific market segmentation depends on the incumbent’s pricing strategy whether to provide discounted price to its old customers and the levels of user upgrade cost and switching cost. When faced with customers who are heterogeneous in the sensitivity to the related costs, the incumbent firm may need to offer a discount to the new customers rather than to those who have purchased from it. This implies that the entry of a SaaS firm into the market is a potential threat to the incumbent on-premises software firm, especially in capturing new customers from the untapped market.
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Telecommunications service is an important and growing market, with worldwide revenue exceeding $2.2 trillion in 2016. In the U.S. market, the total number of mobile wireless connections has grown from 279.6 million in 2008 to 396 million in 2016. All the firms in this market offer consumers an option of purchasing either an individual plan or a family plan. Whereas a menu of individual plans can be thought of as a means to segment the market, the theoretical challenge is to understand how a firm stands to benefit from adding family plans to its product mix. In this paper, we use a game-theoretic framework to explore the role of family plans. Interestingly, we find that even when a family plan does not draw in any new consumers, a firm can still benefit from offering these plans. This occurs primarily because a family plan enables the firm to price discriminate more effectively. In particular, because some consumers can bundle themselves and join a family plan, the firm is able to charge a higher price to single high-valuation consumers who are unable to be part of a family. Furthermore, the presence of a family plan can have a negative impact on the plan offered to single low-valuation consumers who now have to pay a higher overage price. We also show that not all family plans are profitable and that the profitability depends on the sizes of different types of families. The online appendices are available at https://doi.org/mksc.2018.1121 .
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Digital goods, such as software, are significant elements of the contemporary digital economy. The authors propose a model that characterizes dynamic profit-maximizing competitive pricing strategies of digital goods with network effects. In a two-period game theory model, an incumbent firm has a quality advantage in period 1, but the potential disrupter has a quality advantage in period 2. They analyze pricing strategies and characterize conditions under which the potential disrupter becomes an actual disrupter. They discuss implications for user adoption of digital goods and opportunities for future research.
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This research explores the software upgrade strategy in the presence of piracy. When a firm introduces an upgrade, it can adopt a freemium strategy, by offering free products and paid services, or by adopting traditional strategy, and continuing to sell products. We develop a two-period joint model of upgrading and piracy, and use it to compare these two strategies. We find that whether a firm should adopt copyright protection depends on the reservation price for unethical consumers. Additionally, the presence of piracy and premium services can reduce price competition between the original product and the improved version. Freemium strategy always dominates traditional strategy except when the two conditions are satisfied. First, the differentiation between the original product and the improved version in terms of consumer pS must be relatively small. Second, the differentiation between the original product and the improved version in terms of product value must be moderate.
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We study the strategic benefits of mergers and acquisitions (M&As) when competing information technology vendors sell different generations of the same product with different quality. We assume the new product arrives unexpectedly when an installed base of the old product exists. We show that the combination of consumers’ purchase history and heterogeneity leads to new demand complexity that gives rise to innovative product strategies. We find that shelving the old product is an important motivation for M&A. The acquirer may exercise static or intertemporal price discrimination depending on whether it can exercise upgrade pricing. M&A may speed up or slow down new product consumption, and it can lead to delayed new product introduction in some markets. However, it always increases the acquirer’s profit and can sometimes help maximize social welfare. We discuss relevant managerial and policy implications. The online appendix is available at https://doi.org/10.1287/isre.2016.0659 .
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When network effects are important and technology is rapidly improved, this paper explores the relative optimality of five product introduction strategies of a durable goods manufacturer: (1) replacement, (2) skipping, (3) a delayed line, (4) shelving, and (5) line-extension. Using a two-period analytical model, we show how the type of compatibility—either full or backward compatibility—and the magnitude of the network effect influence the manufacturer's preference for the above strategies. Our analysis reveals that only the strategies (1)-(3) above can be optimal; and the optimal strategy varies with network strength. Further, the type of compatibility can dramatically change the profitability under each optimal strategy; for instance, while backward compatibility can increase the profitability of replacement under certain conditions, it always reduces the profitability of a delayed line. We also illustrate that if compatibility were a choice, although backward compatibility may be observed widely in practice, the parametric region for its optimality is relatively more restricted than that of full compatibility. This article is protected by copyright. All rights reserved.
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We develop a two-period model of firm choice with a used good market in which a monopolist producer of durable goods selects quality and price in each period. Our model allows for endogenous quality improvements and demonstrates the importance of analysing the impact of pricing decisions and quality improvements on the secondary market jointly, as under reasonable circumstances, quality improvements can lead to the appearance of a spurious inverse relationship between the price for a new product and the secondary market price. Examined jointly, quality improvements in the new product are shown to lower used good prices, while higher new good prices have the opposite effect. An empirical investigation using a newly compiled data set of the US video game market supports our theoretical analysis.
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In this study, we consider the issue of preannouncing or not preannouncing the development of a new product. Our research is motivated by contrasting views in the literature and varying actions observed in practice. We develop and analyze a game theoretic model that examines the effect of a firm's preannouncement of its product development. Our model is based on a durable goods duopoly market with profit-maximizing firms. The first firm is an innovator who initially begins developing the product; the second firm is an imitator that begins developing a competing product as soon as it becomes aware of the innovator's product. We assume that consumers are rationally expectant and purchase at most one unit of the product when they have maximum positive utility surplus that is determined by the characteristics of the product, the consumer's marginal utility, and the consumer's discounted utility for future expected products. The innovator firm can release information about its product when it begins developing the product or can guard information about its product until it introduces the product into the market. Our analysis and numerical tests show that, under some conditions, the innovator firm can benefit by preannouncing its product and giving the imitator firm additional time to differentiate its product. We discuss these conditions and their implications for new product development efforts.
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There is some question as to whether or not consumers use price as an indicator of product quality. In the case of non-durable goods there is some evidence that consumers do equate higher price products with higher quality products. These products are those that the consumer must experience personally before making a judgment on the product quality. In the case of durable goods there is less empirical evidence to support the price-quality connection. This paper develops a dynamic game model to investigate the price-quality connection in the presence of competition. Specifically, the paper investigates whether or not the optimal pricing strategy in the case of a durable good, where consumers may collect quality information about the product as units diffuse into the market, should be a high quality-high price strategy or a high quality-low price strategy. This question is examined by means of a dynamic game model, which is an extension of the Narasimhan-Ghosh-Mendez (NGM) quality diffusion model. The paper explicitly incorporates competition into the NGM model. Price trajectories for two competing firms are derived so that profits are maximized for the two competitors. It is shown that the price trajectory for the firm using quality as a strategic lever is shown to be lower than that of the firm that was not using a quality strategy. This result strongly suggests that a firm pursuing a quality strategy should couple this strategy with a lower price than its competition and should not couple high prices with high quality in an effort to signal the product’s superior quality to consumers.
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In this paper, we examine the impact of manufacturers upgrading strategy of durable products on the decision of third-party entrant in a secondary market. To do so, we develop a two-period model in which a monopolistic manufacturer sells new durable products directly to end consumers in both periods, while a third-party entrant operates a reverse channel selling used products in the secondary market. The manufacturer releases an upgraded product (i.e., one that is technologically superior to the version introduced in the first period). We derive conditions under which it is optimal (1) for the manufacture to release an upgraded product in the second period and (2) for a third party entrant to enter a secondary market. We also find, through numerical analysis, that when upgrades are typically small or moderate, the upgrading of new products can increase a third party entrant’s profitability in the secondary market but it does not benefit the third party entrant when upgrades are typically large.
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Cloud services have become one of the most popular industry terms since Google and IBM invested to build large data centers that users can program and research over the Internet. In practice, IT corporations often annually pay independent software vendors considerable license fees to save the cost of software upgrade and technology support. Although cloud services are considered a cost-down solution for small or medium IT corporations, there are some limitations making IT corporations hesitate to adopt it. In this research, we examine the investment strategy and profit for cloud service providers to better understand the business model of cloud services. We find that a cloud service provider with R&D capability will prefer vertical competition rather than partnering with an independent software vendor. In addition, for independent software vendors, maintaining a loose partnership is better than a tight one. Finally, we suggest that an independent software vendor shouldn't support its cloud partner to enhance service security and compatibility, both of which may reduce its overall profit.
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The pricing decision of consumer goods manufacturing enterprise is a very important part in its business strategies. Price of the product is directly related to the ability to obtain the expected earnings. In this paper, based on the analysis of the characteristics of durable consumer goods and the factors that affect the price, considering the continuous product innovation and diversification of consumer demand, psychological factors of consumers, as well as the price timeliness, starting from the quantitative point of view, a dynamic pricing model of durable consumer goods aimed at the maximum value of products was set up. Finally, a numerical example solving by the genetic algorithm was given to verify the feasibility of the model.
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As part of the new product development process, firms face the challenge that consumers engage in leapfrogging, which is described as replacing the current product (P0) with the next generation (P2), instead of its latest version (P1). Yet, an overarching examination of the consumer determinants to leapfrogging is missing. This article closes the gap by conducting a field study in the automotive market. Results demonstrate that the tendency to leapfrog is mainly determined by the expected costs involved in switching from the old vehicle (P0) to the new vehicle (P1). The large effect of switching costs suggests that marketing practitioners should consider the price for the new product (P1) and the future product (P2), as well as the price for the old product (P0) to align their strategy concerning the lifecycle of their products. Not only does the article close an important gap in the current leapfrogging literature, it also emphasises a broader perspective of the competition such that a product not only competes with the products of other providers, but with its expected future generations.
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Network externality is an important consideration in many high-technology product markets. In these markets, consumers’ expectations about the future installed base and the resultant externality benefits play a critical role in their product adoption decisions. The authors investigate the strategic implications of consumer uncertainty regarding network externality and show that a firm can credibly convey private information about future installed base through its new product introduction strategy. The authors initially consider a market in which consumers are homogeneous in their valuation of quality. They show that under complete information the optimal strategy entails provision of full (efficient) quality in the first period itself, providing any upgrade in the second period is suboptimal. However, under asymmetric information about externality, a high-externality firm provides less than full quality initially and then makes up for the quality differential through provision of an upgrade in the second period. Thus, underprovision of introductory quality (i.e., withholding quality) serves as a signal of high externality, and upgrades serve as the mechanism for implementation of the signaling strategy. The authors demonstrate the robustness of this result by extending the model to incorporate consumer heterogeneity in quality valuation. The additional insight here is that signaling entails sequential targeting of segments in addition to sequential provision of quality.
Article
Network externality is an important consideration in many high-technology product markets. In these markets, consumers' expectations about the future installed base and the resultant externality benefits play a critical role in their product adoption decisions. The authors investigate the strategic implications of consumer uncertainty regarding network externality and show that a firm can credibly convey private information about future installed base through its new product introduction strategy. The authors initially consider a market in which consumers are homogeneous in their valuation of quality. They show that under complete information the optimal strategy entails provision of full (efficient) quality in the first period itself, providing any upgrade in the second period is suboptimal. However, under asymmetric information about externality, a high-externality firm provides less than full quality initially and then makes up for the quality differential through provision of an upgrade in the second period. Thus, underprovision of introductory quality (i.e., withholding quality) serves as a signal of high externality, and upgrades serve as the mechanism for implementation of the signaling strategy. The authors demonstrate the robustness of this result by extending the model to incorporate consumer heterogeneity in quality valuation. The additional insight here is that signaling entails sequential targeting of segments in addition to sequential provision of quality.
Article
We consider the case of a monopolist supplying an improving durable product to a population that is heterogeneous in its valuation of product quality. In a two-period framework, we show that if consumers expect the product to improve in “present-value” terms, then intertemporal discrimination might result in the first-period marginal consumer being left with zero surplus and some higher-end consumers postponing purchase. The resulting trajectories for quality and price do not constitute a subgame-perfect equilibrium. One of our conclusions is that the logic of profit maximization in the context of rational consumer choice imposes a demand-side constraint on the rate of product improvement. We also emphasize the disequilibrium consequences of improving a product so rapidly that high-end consumers are tempted to wait for a future new-and-improved version. Finally, the formulation adopted in the paper may be useful to understand observed differences in product improvement rates in different markets.
Article
Consider a seller who faces two customer segments with differing valuations of quality of a durable product. Demand is stationary and known, the technology exists to release two products simultaneously, and the seller can commit in advance to subsequent prices and qualities. Should he introduce two differentiated products at once or one at a time? Under the simultaneous strategy, the lower quality would cannibalize demand for the higher quality. To reduce cannibalization, the seller could lower the quality of the low-end model and reduce the price of the high-end. Alternatively, he could increase the quality of the low-end model, but delay its release. Sequential introduction, however, would mean that the profits from the low-end model arrive later. We show that sequential introduction is better than simultaneous introduction when cannibalization is a problem and customers are relatively more impatient than the seller. However, when the seller cannot pre-commit, sequential selling is much less attractive because then he cannot use his product designs to alleviate cannibalization.
Article
We study monopoly pricing of overlapping generations of a durable good. We consider two sorts of goods: those with an active secondhand market and anonymous consumers, such as textbooks, and those with no secondhand market and consumers who can prove that they purchased the old good to qualify for a discount on the new one, such as software. In the first case we show that the monopolist may choose to either produce or repurchase the old good once the new one becomes available. In the latter case we determine when the monopolist chooses to offer upgrade discounts.
New products, upgrades, and new releases: A rationale for sequen-tial product introduction Accepted by Dipak Jain; received October 1998. This paper was with the author for 1 revision
  • V Padmanabhan
  • Rajiv
  • Kannan
  • Srinivasan
Padmanabhan, V., Surendra Rajiv, Kannan Srinivasan. 1997. New products, upgrades, and new releases: A rationale for sequen-tial product introduction. J. Marketing Res. 34(4) 456-472. Accepted by Dipak Jain; received October 1998. This paper was with the author for 1 revision. MANAGEMENT SCIENCE/Vol. 47, No. 11, November 2001 1561
Durable-goods monopolists, rational con-sumers, and improving products Speeding high-tech producer, meet the balking con-sumer
  • Dhebar
  • Anirudh
Dhebar, Anirudh. 1994. Durable-goods monopolists, rational con-sumers, and improving products. Marketing Sci. 13(1) 100-120. . 1996. Speeding high-tech producer, meet the balking con-sumer. Sloan Management Rev. 37(2) 37-49
This paper was with the author for 1 revision
  • Dipak Accepted
  • Jain
Accepted by Dipak Jain; received October 1998. This paper was with the author for 1 revision.