Optimizing Product Launches in the Presence of Strategic Consumers

Ilan Lobel (), Jigar Patel (), Gustavo Vulcano and Jiawei Zhang ()
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Ilan Lobel: Leonard N. Stern School of Business, New York University, New York, New York 10012
Jigar Patel: School of Business, Montclair State University, Montclair, New Jersey 07043
Jiawei Zhang: Leonard N. Stern School of Business, New York University, New York, New York 10012; and New York University Shanghai, Pudong, Shanghai, China 200122

Management Science, 2016, vol. 62, issue 6, 1778-1799

Abstract: A technology firm launches newer generations of a given product over time. At any moment, the firm decides whether to release a new version of the product that captures the current technology level at the expense of a fixed launch cost. Consumers are forward-looking and purchase newer models only when it maximizes their own future discounted surpluses. We start by assuming that consumers have a common valuation for the product and consider two product launch settings. In the first setting, the firm does not announce future release technologies and the equilibrium of the game is to release new versions cyclically with a constant level of technology improvement that is optimal for the firm. In the second setting, the firm is able to precommit to a schedule of technology releases and the optimal policy generally consists of alternating minor and major technology launch cycles. We verify that the difference in profits between the commitment and no-commitment scenarios can be significant, varying from 4% to 12%. Finally, we generalize our model to allow for multiple customer classes with different valuations for the product, demonstrating how to compute equilibria in this case and numerically deriving insights for different market compositions. This paper was accepted by Yossi Aviv, operations management.

Keywords: new product introduction; new product development; strategic consumer behavior; technology products; noncooperative game theory (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (23)

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