Optimal Dynamic Product Development and Launch for a Network of Customers

Forthcoming in Operations Research

82 Pages Posted: 16 Nov 2016 Last revised: 17 Oct 2018

See all articles by Nur Sunar

Nur Sunar

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

John R. Birge

University of Chicago - Booth School of Business

Sinit Vitavasiri

Ericsson Inc.

Date Written: 2018

Abstract

We consider a firm that dynamically chooses its effort to develop a product for a network of customers represented by a connected graph. The technology of the product evolves as a real-valued stochastic process that depends on the firm’s dynamic efforts over time. In addition to dynamically choosing its development effort, the firm chooses when to launch or abandon the product. If the firm launches the product, the firm also chooses a selling price, a promotional price and a target customer to offer promotion. Once the target customer adopts the product, the product diffuses over the customer network based on the topology of the graph and the selling price. The product provides local network benefits to its adopters. The expected local network benefit of adoption is proportional to the number of neighbor customers that have already adopted the product. In a continuous-time setting, we explicitly solve the firm’s jointly-optimal development, launch and post-launch strategies for any connected network. We introduce metrics that allow ordering customer networks with respect to the firm’s optimal expected discounted profit, launch technology and consumer surplus. We also analyze various extensions, including multiple target customers, heterogeneity in customer demand, and heterogeneity in benefit distributions.

Keywords: optimal control, optimal stopping, dynamic product development, launch, product diffusion, graph

Suggested Citation

Sunar, Nur and Birge, John R. and Vitavasiri, Sinit, Optimal Dynamic Product Development and Launch for a Network of Customers (2018). Forthcoming in Operations Research. Available at SSRN: https://ssrn.com/abstract=2869603 or http://dx.doi.org/10.2139/ssrn.2869603

Nur Sunar (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

John R. Birge

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Sinit Vitavasiri

Ericsson Inc. ( email )

San Jose, CA
United States

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