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Abstract:
It has been recognized that when a durable goods manufacturer sells her output, she has an incentive to produce at a rate that will drive down the market price of her product over time. Because anticipation of declining prices makes consumers less willing to invest in owning the durable good, selling can be self-defeating for the manufacturer. If instead, the manufacturer leases her product, she can eliminate her own incentive to decrease the price over time, which allows her to extract larger rents from consumers. In this paper, we investigate how a durable goods manufacturer's choice between leasing and selling is affected by a complementary product that is produced by an independent firm. We show that a durable goods manufacturer who leases her product has an incentive to increase prices (by limiting the availability of her product) in response to the availability of a complement. Since this potential for opportunistic behavior discourages output of the complement, leasing can also be problematic. As a result, the durable goods manufacturer faces a trade-off between leasing, which commits her to not over-produce, and selling, which commits her to not under-produce. Our contribution is to identify this trade-off and show how a durable goods manufacturer can use a combination of leasing and selling to balance its strategic commitment across both its own market as well as the complementary market.

Complementary markets, selling versus leasing, leasing with an option-to-buy

Abstract:
The growing sophistication of component technologies and the rising costs of product development require firms to collaborate in the development of new products by pooling their resources and entering into resource or cost-sharing arrangements. However, the management of new product development that occurs jointly between a technology supplier and its industrial customer presents a new set of challenges. While such vertical collaboration enables each firm to focus on what it does best and achieve certain economies of specialization, it also introduces new issues associated with the alignment of decisions and incentives that have to be managed alongside conventional performance and timing uncertainties of new product development. In this paper, we conceptualize and formulate the co-development of products involving two firms and examine the implications of two collaboration mechanisms found in industrial practice. We term these approaches which involve sharing of the development cost and sharing of the development work, investment sharing and innovation sharing, and find that they have subtle effects on the degree of product innovation and profits of individual firms, depending on the nature and extent of technological uncertainty, product development cost structure, and complementary relationships with other products. We consider both exogenous and endogenous technology uncertainty, and study the impact of investment and innovation sharing on a firm's technology consideration set, product qualities, and profits. Conditions under which firms should consider one mechanism over the other and over single firm product development are proposed. Our analysis shows that, while investment sharing plays an important role in environments with higher levels of technology uncertainty, innovation sharing can result in greater quality improvements and profits if firms are able to manage the distributed product development process more efficiently. We translate our analytical findings into a managerial framework and illustrate it with examples from the industry.

Co-development, investment sharing, innovation sharing, technology uncertainty, product innovation

Abstract:
In many technology-intensive industries, the quality of products offered by firms is constrained by the evolution of a core technology. Therefore, incorporating advanced technologies in new products entails delayed product introduction. However, an early launch of a new product provides a firm several enduring advantages such as larger market presence and greater availability of complements. In this work, we try to identify the strategic factors that drive launch-timing decisions under competition. Specifically, we model the entry timing decisions made by two competing firms that face different technological trajectories. By endogenizing the competitive environment as an outcome of entry decisions, we characterize equilibria in the Product Launch Game under a variety of market conditions. We find that competing firms often take different roles as early leaders or technology leaders by entering a market at different times; this allows them to utilize entry timing as an additional dimension to differentiate themselves from their rival. We also analyze the impact of technological trajectories and market factors such as network effects and growth potential on the profitability of various entry strategies. We show that these factors can affect a firm's equilibrium profits in a counter-intuitive fashion. One of our interesting conclusions is that the level of competition in an industry moderates the significance of different factors that influence equilibrium entry strategies. As a result, firms that fail to understand the extent of competition might emphasize the wrong dimensions in making entry decisions.

time-to-market, competition, technology trajectories, entry/launch timing, network effects

Abstract:
The growing sophistication of component technologies and the rising costs and uncertainties of developing and launching new products now require firms to collaborate in the development of new products. However, the management of new product development that occurs jointly between two firms presents a new set of challenges in sharing the costs and benefits of innovation. While collaboration enables each firm to focus on what it does best, it also introduces new issues associated with the alignment of decisions and incentives that have to be managed alongside conventional performance and timing uncertainties of new product development. In this paper, we conceptualize and formulate the joint-development of products involving two firms with differing development capabilities and examine the implications of arrangements that go beyond sharing of revenues to include sharing of development cost and work. We term these approaches that involve sharing of the development cost and sharing of the development work, investment sharing and innovation sharing, respectively. These cost and effort sharing mechanisms have subtle interactions with the degree to which revenues are shared between firms and the type of development project under consideration. Our analysis shows that investment and innovation sharing are particularly relevant for products with no pre-existing revenues and their benefits also depend on the degree to which revenues are shared between the firms. While investment sharing is more attractive for new to the world product projects with significant timing uncertainty, innovation sharing plays an important role in environments where projects experience product quality uncertainty, firms are similar in their capabilities, and the costs of integration of work across firms can be controlled. Our key contribution involves the modeling of joint work and decision making between collaborating firms and unearthing the complementary role of revenue, cost, and innovative effort sharing mechanisms for new product development. We translate our analytical findings into a managerial framework and illustrate the results with examples from the life-sciences and electronics industries.

Co-development, investment sharing, innovation sharing, technology uncertainty, product innovation, bargaining

Abstract:
In spite of the fact that many durable products are sold through dealers, the literature has largely ignored the issue of how product durability affects the interactions between a manufacturer and her dealer(s). We seek to fill this gap by considering a durable goods manufacturer that uses an independent dealer(s) to get her product to consumers. If the manufacturer sells her product to the dealer, then the dealer can either sell or lease it to the final consumer. On the other hand, if the manufacturer leases her product to the dealer, then the dealer is forced to lease it to the consumer. We first characterize the equilibrium for a manufacturer who distributes through a single dealer as a function of the costs of production and distribution. Among other things, we show that the selling and leasing decisions of the two channel partners should balance operational efficiency against the mitigation of time inconsistency. Subsequently, we characterize the equilibrium for a manufacturer who distributes through multiple dealers as a function of the intensity of inter-dealer competition. One of our more interesting findings is that, when the level of competition among dealers is high, the manufacturer prefers to lease the product to her dealers, which forces them to lease to consumers. This complements existing results that show that when suppliers of durable goods interact directly with consumers, then selling becomes the dominant strategy when competitive intensity is high.

durable goods, decentralized channel, time -inconsistency, double-marginalization, competition

Abstract:
In spite of the fact that many durable products are sold through dealers, the literature has largely ignored the issue of how product durability affects the interactions between a manufacturer and her dealers. We seek to fill this gap by considering a durable goods manufacturer that uses independent dealers to get her product to consumers. In contrast to much of the literature, we specifically consider the possibility that if the manufacturer sells her product, then the dealers can either sell or lease it to the final consumer. One of our more interesting findings is that, when the level of competition among dealers is high, the manufacturer prefers to lease the product to her dealers, which forces them to lease to consumers. This complements existing results that show that when suppliers of durable goods interact directly with consumers, selling is the dominant strategy for high levels of competitive intensity. In addition, our results help to explain differences in the selling / leasing policies that are observed in the office equipment and automobile industries.

channel structure, durability, time -inconsistency, double-marginalization, competition

Abstract:
New product development in several industries is driven by innovations in underlying technologies. Firms developing new generation products often face the following choice: they can either introduce a product based on a proven and immediately available technology, or delay product introduction to incorporate a superior, yet unproven, technology. In this paper, we study how competing firms introduce new products in such technologically fluid environments. We show that this technology selection decision for new-generation products depends on the evolution of technology trajectories, the additional risk involved in developing advanced versions and the competitive intensity in the end-product market. By staggering their new product introductions over time, firms are able to utilize introduction timing as an additional dimension to distance themselves from their rival. The optimal investment by a firm in product development, and its sensitivity with respect to competition, are also characterized. We also extend our analysis to consider the impact of market factors such as network effects and growth potential on the profitability of different introduction strategies.

Introduction Timing, Technology Trajectories, Competition, Network Effects, Product Innovation, Operations Strategy

Abstract:
We consider a dynamic inventory (production) model with general order (production) costs and excess demand that can be backordered or refused by the firm. A unit backordered incurs a backorder cost, a unit refused incurs a lost sales charge. Endogenizing the sales decision is necessary in the presence of general convex order costs so that the firm is not forced to backorder a unit whose subsequent procurement would reduce total profits. In each period, the firm must determine the optimal order/production and sales strategy. We show that the optimal policy is characterized by an optimal buy up to level that increases with the initial inventory level and an order quantity that decreases with the initial inventory level. More importantly, we show the optimal sales strategy is characterized by a critical threshold, a backorder limit, that dictates when to stop selling. This threshold is independent of the initial inventory level and the amount purchased. We investigate various properties of this new policy. As demand stochastically increases, the amount purchased increases but the amount backordered decreases, reflecting a shift in the way excess demand is managed. We develop two regularity conditions, one that ensures some backorders are allowed in each period, and another that ensures the amount backordered is nondecreasing in the length of the planning horizon. We bound the buy up to levels in our model using buy up to levels from the pure lost sales and pure backlogging models. We illustrate our findings and results using several numerical examples.

dynamic programming, inventory and production, convex order costs, backorder limit

Abstract:
We develop a theory of insurance claim settlement whose structure embodies an insurer’s capacity decision and negotiation between the insurer and claimant in an asymmetrically informed environment. We offer a solution to an insurer’s choice of upfront claim settlement amount under a plausible set of assumptions. Implications from theory are tested with a large sample of liability insurance claims collected over two years in the state of Texas and we find that insurer’s deployment of more capacity to handle a claim and longer settlement times occur for claims with more uncertainty. The empirical results also reveal factors relevant to insurer’s operational choices. Descriptive features of a claim, the age of the claimant and attorney representation on the plaintiff’s side are important determinants of the final settlement amount.

insurance, claims, economic incentives, capacity

Abstract:
Firms in a variety of different industries offer addon products to consumers who have previously purchased a base-product. We hypothesize that consumers, in making their decision whether to purchase such addons, perceive the price paid for the base-product as “wasted” if they do not continue on to purchase the addon. This waste aversion implies that the demand for a sequentially sold addon may be positively correlated with the price of the base-product. We conduct a laboratory experiment that tests the proposed hypothesis, and examine the implications of such consumer waste-aversion to the development and pricing decisions of a firm who sells base-product addon pairs.

The experiment confirms that, consistent with the waste-aversion perspective, the price of the base-product may have a positive impact on the likelihood of purchase of an addon. Modeling and analysis of this bias shows that penetration pricing strategies (such as loss-leader pricing), which rely on charging very low prices for the base-product, may be sub-optimal when the consumers are waste-averse. Furthermore, the identified bias makes it optimal for the firm to spend more resources toward enhancing the base-product quality, and less in enhancing the quality of the addon.