Innovation uncertainty, new product press timing and strategic consumers

Abstract

© 2018 Elsevier Ltd Innovation is critical to a firm's success in the current world. Several key features play important roles in the innovation process, including the innovation level, innovation uncertainty and new product press timing. This paper develops a framework where a high-tech firm sequentially introduces new products with incremental innovation over two selling seasons in the presence of strategic consumers and uncertain demand, to address the firm's optimal stocking and pricing decisions, and investigate how the key innovation features impact the firm's operational strategy and profit. By characterizing the subgame perfect Nash equilibrium with rational expectations, we find: (1) Strategic consumers can increase the firm's profit when demand variance is high, for the successive innovation allows the firm to take advantage of consumers’ deferred purchase to better match supply and demand. (2) The firm's total expected profit always decreases with respect to the new product press time under certain mild condition, but can be non-monotonic with respect to the R&D success probability and incremental innovation level. (3) Whether the firm marks down is jointly determined by the ratio of relative innovation efficiency to the consumer's waiting cost and the realized demand; high innovation level can play a role as price commitment when it exceeds one threshold.