Optimal Temporal Product Introduction Strategies under Valuation Changes and Learning

Suman Mallik and Dilip Chhajed
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Suman Mallik: U of Illinois at Urbana-Champaign
Dilip Chhajed: U of Illinois at Urbana-Champaign

Working Papers from University of Illinois at Urbana-Champaign, College of Business

Abstract: Consider a firm facing two consumer segments with differing valuations for quality. The demand is stationary and known, and consumers make repeat purchase. However, once a premium product is introduced, the valuations of the consumers change in the next period. The firm derives a cost savings due to learning effect in the second period, the magnitude of which depends on the volume in the first period. Under such a situation, should a firm introduce a premium product before a basic product or vice-versa? Should it introduce two products simultaneously? What should it then do in the second period? Should it introduce a single product into the market first and expand its product offering later? Using a two-period stylized model we seek to answer these questions. We characterize the optimal product introduction strategy for the firm. We show how the firm's choice is influenced by cost savings and valuation changes. The managerial implications of the model are also discussed.

Date: 2002
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