Consumer Valuation of Modularly Upgradeable Products

Sezer Ülkü (), Claudiu V. Dimofte () and Glen M. Schmidt ()
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Sezer Ülkü: McDonough School of Business, Georgetown University, Washington, DC 20057
Claudiu V. Dimofte: College of Business Administration, San Diego State University, San Diego, California 92182
Glen M. Schmidt: David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112

Management Science, 2012, vol. 58, issue 9, 1761-1776

Abstract: Although product modularity is often advocated as a design strategy in the operations management literature, little is known about how consumers respond to modular products. In this research we undertake several experiments to explore consumer response to modularly upgradeable products in settings featuring technological change. We consider both the initial product choice (between a modularly upgradeable product and an integral one) and the subsequent upgrade decision (replacement of a module versus full product replacement). First, we show that consumers tend to discount the cost savings associated with modular upgrades excessively (insufficiently) when the time between the initial purchase and the upgrade is short (long). This suggests that modular upgradability as a product feature has higher profit potential for slowly rather than rapidly improving products. Second, we observe a preference reversal between the initial purchase and the point of upgrade: At the point of initial purchase, people foresee making a full product replacement in the future, yet, when faced with the actual upgrade decision, they are more likely to revert to modular upgrades. Finally, we discuss and test several pricing and product design strategies that the firm can use to respond to these cognitive biases. This paper was accepted by Kamalini Ramdas, entrepreneurship and innovation.

Keywords: product architecture; modularity; product upgrades; product replacement; pricing; temporal construal; hyperbolic discounting; resource slack (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (13)

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