The computer software industry is an extreme example of rapid new product introduction. However, many consumers are sophisticated enough to anticipate the availability of upgrades in the future. This creates the possibility that consumers might either postpone purchase or buy early on and never upgrade. In response, many software producers offer special upgrade pricing to old customers in order to mitigate the effects of strategic consumer behavior. We analyze the optimality of upgrade pricing by characterizing the relationship between magnitude of product improvement and the equilibrium pricing structure, particularly in the context of user upgrade costs. This upgrade cost (such as the cost of upgrading complementary hardware or drivers) is incurred by the user when she buys the new version but is not captured by the upgrade price for the software. Our approach is to formulate a game theoretic model where consumers can look ahead and anticipate prices and product qualities while the firm can offer special upgrade pricing. We classify upgrades as minor, moderate or large based on the primitive parameters. We find that at sufficiently large user costs, upgrade pricing is an effective tool for minor and large upgrades but not moderate upgrades. Thus, upgrade pricing is suboptimal for the firm for a middle range of product improvement. User upgrade costs have both direct and indirect effects on the pricing decision. The indirect effect arises because the upgrade cost is a critical factor in determining whether all old consumers would upgrade to a new product or not, and this further alters the product improvement threshold at which special upgrade pricing becomes optimal. Finally, we also analyze the impact of upgrade pricing on the total coverage of the market.

Distributed product development is becoming increasingly prevalent in a number of industries. We study how the global distribution of product development impacts the profit‐maximizing product line that a firm offers. Specifically, we formulate a model to understand the linkage between cost arbitrage as a driver of distributed development and consequent market implications such as customer perceived quality loss to remotely developed products. Analysis of the model reveals that a firm should expand the product line for a development‐intensive good only at intermediate values of cost advantage and quality loss. We modify the base model to include development capacity constraints as a driver of distributed development and find that the results are robust to this change. Our analysis affirms the need for product managers to incorporate the implications of distributed development in making their product line design decision.

T he introduction of product upgrades in a competitive environment is commonly observed in the software industry. When introducing a new product, a software vendor may employ behavior-based price discrimination (BBPD) by offering a discount over its market price to entice existing customers of the competitor. This type of pricing is referred to as competitive upgrade discount pricing and is possible because the vendor can use proof of purchase of a competitor's product as credible evidence to offer the discount. At the same time, the competitor may offer a discount to its own previous customers in order to induce them to buy its upgrade. We formulate a game-theoretic model involving an incumbent and entrant where both firms can offer discounts to existing customers of the incumbent. Although several equilibrium possibilities exist, we establish that an equilibrium with competitive upgrade discount pricing is observed only for a unique market structure and a corresponding unique set of prices. In this equilibrium, instead of leveraging its first mover advantage, the incumbent cedes market share to the entrant. Furthermore, the profits of both the incumbent and the entrant reduce with switching costs. This implies that the use of BBPD has product design implications because firms may influence the switching costs between their products by making appropriate compatibility decisions. In addition, lower switching costs result in reduced consumer surplus. Hence, a social planner may want to increase switching costs. The resulting policy implications are different from those prevalent in other industries such as mobile telecommunications where the regulators reduced switching costs by enforcing number portability.

Ram Balais an assistant professor of Operations Management at the Indian School of Business in Hyderabad, India. He holds a PhD in Management Science from the UCLA Anderson School of Management. His main research areas are product line design, promotional effort allocation, global product development and pricing and contracting strategies for services. His research cuts across disciplinary lines, particularly operations management, marketing and information systems.ABSTRACT With the emergence of high speed networks, software firms have the ability to deploy 'software as a service' and measure resource usage at the level of individual customers. This enables the implementation of usage-based pricing. We study both fixed and usage-based pricing schemes in a competitive setting where the firm incurs a transaction cost of monitoring usage if it implements usage-based pricing. Offering different pricing schemes helps to differentiate the firms and relax price competition, particularly at higher monitoring costs, even when competing firms offer the same service quality. However, the low usage customers acquired by offering usage-based pricing are unable to compensate for the monitoring costs incurred. This implies that managers should be cautious about implementing usage-based pricing in a competitive setting.

In the pharmaceutical industry, a product recall financially impacts not only the firm undertaking the recall but also other competitors in the category since it affects physician and consumer perception of the category as a whole. Often, such competitors have to engage in defensive marketing at the category level without complete certainty about whether a recall will occur or not. Such defensive effort could then lead to a change in postrecall sales effort directed at capturing market share in that category. This decision is affected by the probability of the recall and the size of the loyal segment in the category facing the recall, i.e., physicians who will continue to prescribe the category even without marketing effort. We focus on competitor reaction to product recalls where the competitor participates in multiple product categories that exhibit (dis)economies of scope in sales effort across them. Equilibrium analysis of our game-theoretic model uncovers several managerial insights that illustrate the importance of scale (dis)economies on the competitor’s promotional strategy in the wake of a recall. First, economies of scope across the two products leads to either an increase or decrease in postrecall sales effort for both products simultaneously depending on the loyal market size for the category. Second, diseconomies of scope can lead to a complete withdrawal of postrecall sales effort from one of the two products depending on the size of the loyal market, the cross-category price, and the recall probability. Third, as the recall probability increases, category-defense effort and postrecall sales effort are unequivocally complementary given economies of scope across the two products but may be substitutes given diseconomies of scope. The online appendix is available at https://doi.org/10.1287/mksc.2017.1054 .

Physicians may learn about prescription drug effectiveness directly from the firm via detailing or from patient experience. Patient-mediated learning is aided by the use of free drug samples. The effective use of samples is hampered by a lack of understanding of its exact return on investment implications. We seek to fill this gap by incorporating the physician's sample allocation behavior in the firm's decision making. We uncover the following implications for firms as well as policy makers. First, we find that the optimal sampling level for a drug category is a nonmonotonic function of patient payment ability and the price of the drug. Second, an increase in the cost of samples can lead to an increase in sampling and a decrease in detailing when the physician's propensity to provide sample subsidies is high. Third, when future market growth is expected to be high (early stage product life cycle and/or chronic drugs) and sampling efficiency is low, the use of sampling is profitable for the firm but leads to lower market coverage than when sampling is disallowed.

Using life‐cycle assessment–based methods, products can be differentiated by the environmental performance/impact during their manufacturing and use life‐cycle stages. Some products are reported to have higher environmental impact during the use stage, whereas for others, the environmental impact turns out to be higher during the manufacturing stage. In this article, we focus on those products in the former category, and consider a duopoly setting where profit‐maximizing firms decide on their use‐stage environmental innovation efforts, advertising efforts to disclose information on the manufacturing‐stage environmental performance of their products, and production quantities. Use‐stage environmental innovation not only improves the environmental performance of the product in use, but also increases the value of the product to end‐consumers (e.g., through cost‐of‐use reduction). We examine two distinct cases where such innovation can be achieved through either an up‐front capital investment or an increase in variable cost of production. Manufacturing‐stage environmental performance of a product is typically not visible to end‐consumers but could be communicated through advertising efforts. Two well‐recognized advertising strategies—namely, combative advertising and constructive advertising—are analyzed as alternative information disclosure strategies. We show that when only symmetric strategies are followed by competing firms (i.e., when each firm matches its competitor's advertising approach), firms should always employ constructive advertising strategy to disclose information on the manufacturing‐stage environmental performance of their products, and this result holds regardless of the environmental innovation cost structure. When asymmetric strategies are also an option, for marginal cost‐intensive innovations, the equilibrium can be characterized by asymmetric advertising strategy choices of symmetric firms, whereas for development cost‐intensive innovations, it is always characterized by symmetric advertising strategy choices. In this context, we advance understanding on when use‐stage environmental innovation and manufacturing‐stage environmental performance disclosure decisions can be the most effective economically to competing firms and examine their corresponding environmental consequences.

No abstract