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Product upgrading or not: R&D tax credit, consumer switch and information updating

Xiutian Shi and Bin Shen

International Journal of Production Economics, 2019, vol. 213, issue C, 13-22

Abstract: Research and Development (R&D) investment is critically important for an innovation firm to maintain market value. In this paper, we examine whether the firm should adopt the product upgrading strategy. We build up a newsvendor model with Bayesian information updating. The firm produces and sells a normal product in the first period, and decides whether to make R&D investment to upgrade the product and switch to the line of upgraded one. The consumer may or may not switch from the normal product to the upgraded one in the second period based on the comparison of surplus. We find that it is beneficial to adopt the product upgrading strategy when the degree of upgraded product demand uncertainty is below a certain threshold. We identify the conditions, under which both the firm and consumer welfare would be better off, once the firm decides to sell the upgraded product. More managerial insights are discussed.

Keywords: Behavioral operations management; Consumer switch; Consumer welfare; Two-period; R&D; Information updating (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:proeco:v:213:y:2019:i:c:p:13-22