Inference of a Firm's Learning Process from Product Launches

51 Pages Posted: 24 Jun 2023

See all articles by Léonce B. Ano

Léonce B. Ano

University of Navarra, IESE Business School

Victor Martinez-de-Albeniz

IESE Business School - University of Navarra

Date Written: June 20, 2023

Abstract

In dynamic business environments, firms must make sequential decisions that account for changes in consumer interests. As consumer interests gradually evolve, firms need to be aware of available decision alternatives to identify promising options. This raises the question of how a firm's current knowledge allows it to make better decisions. To answer this question, we develop a framework in three steps to describe the mechanism for knowledge creation and rule formation when launching new products. First, we conceptualize the firm as an agent using a belief-based decision algorithm based on statistical and psychological literature. Second, we formulate hypothesis about the algorithm's knowledge update and choice rules components and propose a sleeping contextual bandit model of decision-making to solve the exploitation-exploration problem. Third, we use Bayesian hypothesis testing to structurally describe the firm's sequential choice process. We validate our procedure with product decision histories and performance data over 60 years from a leading toy product design firm. We find that a multinomial logit model yields predictions equivalent to a no-belief update Softmax model. However, unlike UCB and Greedy models, the multinomial logit model fails to accurately represent data generated by a firm operating in a changing environment. Finally, we illustrate how one aspect of the firm's adaptation process to changing environment occurs through leveraging product category heterogeneity and transferring knowledge across product features.

Keywords: Innovation, exploration-exploitation, learning process, Bayesian inference, contextual bandit, product decisions, agent's cognition, organization learning.

Suggested Citation

Ano, Léonce B. and Martinez-de-Albeniz, Victor, Inference of a Firm's Learning Process from Product Launches (June 20, 2023). IESE Business School Working Paper No. 4486115, Available at SSRN: https://ssrn.com/abstract=4486115 or http://dx.doi.org/10.2139/ssrn.4486115

Léonce B. Ano (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Victor Martinez-de-Albeniz

IESE Business School - University of Navarra ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

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