Sequential versus Concurrent Product Development: Approval Uncertainty, Time-Sensitive Consumption Utility, and Asymmetric Competition
48 Pages Posted: 16 Feb 2022
Date Written: January 4, 2022
Concurrent product development process can enable a firm to gain the first mover advantage by developing a new product faster. However, concurrent development strategies often involve upfront investments that the firm cannot recoup if the product fails to obtain regulatory approval. In view of this approval risk and the market risk arising from consumer behavior and competition, should a firm adopt the concurrent development strategy? We examine this research question by using the Covid-19 vaccine development process as the backdrop. To speed up the Covid-19 vaccine development process, several pharmaceutical firms switched from the traditional sequential process to the concurrent process by taking some financial risks to manufacture their vaccines ``before'' receiving FDA's approval for emergency use. Besides process choice (sequential or concurrent), this unprecedented vaccine development process has three salient features: (a) uncertain product approval, (b) time-sensitive consumer utility, and (c) asymmetric competition where one firm has a higher ex-ante approval probability (the hare) than the other firm (the tortoise). We examine how these salient features affect the equilibrium process choice (sequential or concurrent) adopted by each firm.
Our equilibrium analysis reveals that it is possible for zero, one, or both firms to adopt the concurrent process. Interestingly, it is possible for the tortoise to adopt the concurrent process while the hare adopts the sequential process in equilibrium. Also, we find that firms would become more reluctant to adopt the concurrent strategy in equilibrium when: (1) the upfront investment cost is high; (2) firms are highly asymmetric; or (3) consumer utility is less time sensitive. Using these results, we discuss subsidy policy implications in the context of Covid-19 vaccine development when there is an urgent need for the government to entice more firms to speed up the process by adopting the concurrent strategy.
Keywords: Product Development Process, Asymmetric Competition, Time-Sensitive Demand, Uncertainty
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