Publication Type

Journal Article

Version

submittedVersion

Publication Date

3-2018

Abstract

Frequent new product releases pose significant challenges for firms as they manage successive generations of product diffusion. We develop an analytical model to study the effect of different purchase options by strategic consumers on a firm's profit and the firm's strategies for the timing and pricing of its successive generations of product diffusion. We show that consumers' strategic behavior, although adversely affecting the sales of the first-generation product, positively influences the sales of the second-generation product through an initial “seeding” effect. The influence of strategic consumers on profit and sales depends largely on the discount-to-price ratio of the first generation relative to the performance improvement in the second generation. When the relative discount is small, the “seeding” effect on the second-generation product dominates. When the relative discount is large, the “cannibalization” effect on the first-generation product dominates. We further demonstrate that the optimal entry timings recommended in the literature (i.e., “now,” “maturity,” or “never”) can occur under different market conditions. In general, higher performance improvement and lower salvage value would support a higher optimal price, a larger discount, and a later introduction time. In addition, the firm can benefit from patient consumers when the performance improvement is relatively small, and it can induce the complete substitution of the later generation for the earlier generation when the performance improvement is relatively large. Overall, our model provides a theoretical foundation for understanding the effect of consumer strategic behavior on product diffusion, and our results offer important insights about firms' multi-generation product diffusion strategies.

Keywords

Analytical modeling, Economics of IS, Optimization, Product diffusion, Strategic consumers

Discipline

Computer Sciences | Management Information Systems | Strategic Management Policy

Research Areas

Information Systems and Management

Publication

Information Systems Research

Volume

29

Issue

1

First Page

206

Last Page

224

ISSN

1047-7047

Identifier

10.1287/isre.2017.0720

Publisher

INFORMS (Institute for Operations Research and Management Sciences)

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1287/isre.2017.0720

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