Sequential versus Concurrent Final Phase Product Development: Approval Uncertainty, Time-Sensitive Consumers, and Asymmetric Competition

Abstract

Should a firm begin its production even before its new product is approved? In a competitive market
with time-sensitive consumers, a firm may choose to adopt the “concurrent process” by conducting the approval process and the production process in parallel so that the product will become available for sale once approved. However, to avoid incurring upfront (production related) investments that are non-recoverable should the product fail to receive approval, a firm may opt for the “sequential process” so that the production process will only begin after approval. But such a sequential process can delay product launch, making the firm less competitive. These trade-offs between the concurrent and sequential development processes and the recent Covid-19 vaccine development motivate us to examine the process choice in the presence of three salient factors: (a) uncertain product approval, (b) time-sensitive consumers, and (c) asymmetric firm competition – the leading firm has a higher ex-ante approval probability than the laggard firm.

Our equilibrium analysis reveals that, in equilibrium, it is possible for the laggard firm to aggressively adopt the concurrent process whereas the leading firm adopts the sequential process. We also examine how these factors affect the equilibrium strategy. First, as the approval requirement tightens, both firms have a lower chance of receiving approval, and the laggard firm is more likely to adopt the sequential process than the leading firm. Second, as consumers become more time-sensitive, the leading firm is more eager to adopt the concurrent process than the laggard firm. Finally, when the firm asymmetry is large (i.e., firms have significantly different ex-ante approval probabilities), competition does not always soften and both firms may compete directly by adopting the sequential process when the requisite investment for the concurrent strategy is sufficiently high. We also extend our analysis to the case when consumers are “forward-looking” instead of “myopic”. We find similar equilibrium structure. However, because forward-looking behavior creates fierce competition between firms, both firms are more likely to adopt the concurrent process. Finally, we consider the case when the government offers subsidies to defray the non-recoverable investments to entice at least one firm to adopt the concurrent strategy so as to increase the chance of having an approved product available sooner. Interestingly, we find such a subsidy can backfire resulting in lower consumer welfare and lower profit for the firms especially when consumers are time-insensitive.

Keywords: Product Development Process, Asymmetric Competition, Time-Sensitive Demand, Uncertainty