I Don’t 'Recall': The Decision to Delay Innovation Launch to Avoid Costly Product Failure
52 Pages Posted: 10 Dec 2019
Date Written: November 22, 2019
Innovations typically embody novel features or cutting-edge components aimed at delivering desired customer benefits. Oftentimes, however, we observe the need to recall new products shortly after their launch. Indeed, a firm may rush an innovation to market in an attempt to preempt rivals and capture early demand, yet in so doing forgo rigorous testing and, thus, subject itself to the risk of a product recall. To shed light on this phenomenon, we construct a game-theoretic model in which ex-ante identical firms plan to launch their innovations. Each firm must decide whether to conduct time-consuming quality assurance testing, which ensures no defects or safety problems but delays product introduction. If the innovation is released without such testing and a recall occurs, the firm incurs pecuniary costs and faces future reputation damage. We identify conditions for an asymmetric equilibrium to emerge in this context, whereby one firm conducts testing to deliver a fail-proof product while the other rushes to market. We also establish how competition may induce both firms to launch their innovations immediately, even though a monopolist would conduct thorough testing. The framework is extended to examine how product recall considerations affect firms’ research and development (R&D) and product selection decisions. Though, in general, post-innovation product failure discourages R&D investments, we uncover a novel mechanism in which an increase in the failure possibility stimulates firms to undertake R&D effort. Furthermore, we derive conditions under which a firm may ex-post shelve a fully vetted innovation and stick with its mature product.
Keywords: innovation management, product recall, quality assurance testing, launch-timing, new product development, game theory
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