Integrated Product Architecture and Pricing for Managing Sequential Innovation

28 Pages Posted: 23 Jan 2011

See all articles by Vish Krishnan

Vish Krishnan

University of California, San Diego (UCSD) - Rady School of Management

Karthik Ramachandran

Georgia Institute of Technology - Scheller College of Business

Date Written: January 20, 2011

Abstract

Science and technology advances drive firms to continually enhance their product’s performance and launch sequentially improving offerings. Firms face challenges in marketing such improving products to well informed, forward-looking consumers who anticipate product improvements and seek to delay their purchase timing. Product design, specifically a modular upgradable architecture in which improving and stable subsystems of a product are separated and selectively upgraded, can be a valuable approach for marketers to alleviate consumer concerns about product obsolescence. However, such an architecture-based approach can present new challenges as well, dealing with which requires carefully coordinated cross-functional decision making by the firm. In this paper, we identify and formalize the notion of design inconsistency, which refers to the monopolist firm’s inability to commit to future product design architectures. We find that firms experience design inconsistency even when they are able to commit to future prices, and design inconsistency lowers firm profits as well as consumer surplus. We then derive a joint product architecture and pricing approach to solve this problem; this enables an innovating firm to optimally and in a time consistent manner launch modular upgradable products.

The modeling and analysis in the paper lends insight into types of markets and products for which modular upgradability is most appropriate, and offers guidelines on making pricing and product design decisions jointly for managing sequential innovation.

Keywords: Product Design and Pricing, Modular Upgradability, Sequential Innovation

Suggested Citation

Krishnan, Vish and Ramachandran, Karthik, Integrated Product Architecture and Pricing for Managing Sequential Innovation (January 20, 2011). Available at SSRN: https://ssrn.com/abstract=1744362 or http://dx.doi.org/10.2139/ssrn.1744362

Vish Krishnan (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Karthik Ramachandran

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
(404) 894-8631 (Phone)

HOME PAGE: http://https://sites.gatech.edu/karthikr/

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