Managing Reference-Group Effects in Sequential Product Upgrades

Production and Operations Management, 2022, 31(2):442-456

33 Pages Posted: 17 May 2013 Last revised: 7 Dec 2022

See all articles by Jiong Sun

Jiong Sun

Purdue University - Department of Consumer Sciences and Retailing

Jinhong Xie

University of Florida - Warrington College of Business Administration

Tao Chen

University of Maryland

Fei Li

Independent

Gao Wang

China Europe International Business School (CEIBS)

Date Written: July 13, 2021

Abstract

In this paper, we examine how firms can leverage reference-group effects (RGEs) in sequential introduction of upgraded products. RGEs arise when consumers engage in social comparisons: leaders desire to distinguish themselves from followers and followers desire to mimic leaders. We find that RGEs have a non-monotonic impact on the profitability of product upgrades: a stronger RGE first increases and then decreases profits. This inverted-U effect is fundamentally driven by two opposite effects of RGEs: a positive push effect on leaders’ upgrading to a new generation when followers adopt an existing product that leaders possess, and a negative pull effect on followers’ adoption of the existing product when leaders upgrade to the new product. We also offer insights on inter-generational differentiation in the presence of RGEs. We find that by coordinating product differentiation in two dimensions, functional improvement and exterior form, the firm is able to eliminate the negative pull effect, which occurs when the strength of RGEs is intermediate. In such cases, both functional improvement and exterior differentiation increase with the strength of RGEs. When the strength of RGEs is sufficiently high, however, the firm will focus on exterior differentiation rather than functional improvement. Managerial implications are discussed.

Keywords: reference-group effects; product upgrades; inter-generational differentiation; functional improvement; exterior form

Suggested Citation

Sun, Jiong and Xie, Jinhong and Chen, Tao and Li, Fei and Wang, Gao, Managing Reference-Group Effects in Sequential Product Upgrades (July 13, 2021). Production and Operations Management, 2022, 31(2):442-456, Available at SSRN: https://ssrn.com/abstract=2266115 or http://dx.doi.org/10.2139/ssrn.2266115

Jiong Sun (Contact Author)

Purdue University - Department of Consumer Sciences and Retailing ( email )

West Lafayette, IN 47907
United States

Jinhong Xie

University of Florida - Warrington College of Business Administration ( email )

209 Bryan Hall Campus Box 117155
Gainesville, FL 32611-7166
United States
352-392-0161 Ext. 1233 (Phone)
352-846-0457 (Fax)

HOME PAGE: http://bear.cba.ufl.edu/xie/Xie_DirectoryProfile.htm

Tao Chen

University of Maryland ( email )

College Park
College Park, MD 20742
United States

Fei Li

Independent ( email )

Gao Wang

China Europe International Business School (CEIBS) ( email )

699 Hongfeng Rd
Pudong
Shanghai, 201206
China
86-10-82966803 (Phone)

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