Leading or Lagging in Product Design? Impact of Customer Preference Uncertainty and Social Influence

Abstract

When designing new products, firms face not only customer preference uncertainty, but also sophisticated social influence among customers. The social influence suggests that customers' decisions could be influenced by the mainstream view/opinion shared by the crowd; e.g., conformist customers tend to adopt products that cater to the taste of the crowd. Despite the strong link between social influence and customer adoption, it is not clear how this would affect firms' product design decisions, especially in the presence of customer preference uncertainty. Thus, we develop a game-theoretical model to study the decisions of two firms that design and sell horizontally differentiated products. Both firms make strategic choices between a leading strategy by conducting an early product design before the uncertainty resolves to gain market leadership, and a lagging strategy by conducting a late product design after the uncertainty resolves to obtain customer preferences and flexibility value. Firms then compete in product design and price. We find that higher customer preference uncertainty and higher customer conformity encourage firms' adoption of the lagging strategy, which however would result in the prisoner's dilemma. It is interesting that a higher degree of customer conformity may incentivize product novelty (differentiation) when both firms adopt the leading strategy. And a certain level of conformity may enhance consumer surplus due to less product differentiation. Our study sheds light on the important roles of customer preference uncertainty and social influence on firms' strategic decisions about product design timing and offerings, which helps understand the diverse strategies observed in practice.

Keywords: Product design, Social influence, Product novelty, Game theory