Late Product Release: The Strategic Benefit of Lost Sales
46 Pages Posted: 6 Apr 2020
Date Written: March 11, 2020
When a firm’s competitor releases its product earlier than the firm, many consumers may decide to buy the competitor’s product, rather than wait for the firm’s product release. Hence, in the absence of product improvement effects or any other late-mover advantages, the firm should benefit by hastening its product release to avoid losing too many sales. In this paper, we analyze the strategic relationship between the firms’ product release timing and pricing decisions, and we find that even when there are no product improvement benefits and late-mover advantages, the firm may be better off by releasing its product later than the competitor. Furthermore, under certain conditions, the firm can benefit if its competitor captures a large share of the early market, rather than a small share. In other words, an increase in the competitor’s market penetration level can benefit the firm. Intuitively, by releasing its product later, the firm induces its less committed customers to buy the competitor’s product, while the firm’s more committed customers choose to wait for the firm’s product release. When the firm finally releases its product, it has an incentive to charge a higher price to extract more surplus from the segment of consumers who postponed their purchases. The firm’s increased price induces the firm’s competitor to also increase its price, alleviating price competition and benefiting all firms. Further, our results suggest that the firm that is the first to release its product may be better off by using penetration pricing strategy rather than price skimming, because penetration pricing will help mitigate future price competition, while price skimming will make it more intense.
Keywords: New Product Release, Market Entry, Entry Timing, Competition, Dynamic Pricing
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