Demand cannibalization during product rollovers in the presence of strategic customers

Abstract

This paper studies how different types of demand cannibalization take place during product rollovers and their effects on a firm's profitability. Due to continuous product upgrades, demand cannibalization among various generations of products has become a common practice, raising interesting investigations from professionals and academics. Within this context, we model firms’ and customers’ decision-making as a two-period sequential game and derive equilibrium results under a dual rollover strategy, with and without a trade-in program. We find that demand cannibalization is essentially caused by customers’ strategic comparison of available purchase options. Our analysis further reveals that both the cannibalization effect and the postponement effect resulting from customers’ waiting for upgraded products are necessary for firms to improve profits. On the contrary, the postponement effect due to waiting for a discount is entirely detrimental to the firm. We propose effective launch strategies to avoid unfavorable demand cannibalization under different conditions. In addition, offering trade-in programs helps not only suppress strategic waiting, but also foster demand for an upgraded product. These strategies are particularly effective when the firm holds a greater quantity of inventory or when the degree of incremental innovation is high.