Context-Dependent Preferences and Innovation Strategy

Abstract

D isruptive innovations introduce a new performance dimension into a product category, but often suffer from inferior performance on key performance dimensions of their existing substitutes. Hence, the followers of these innovations face an important decision to make: they must choose to improve the new technology either on the key performance dimension shared with the old technology or on the new performance dimension. This paper investigates which path firms should choose when they face such a dilemma in the absence of any cost or capability issues. In doing so, we integrate customer response into the theory of technological evolution and allow preferences on the product choices to be context dependent. We show that context-dependent preferences may encourage the follower to improve the new technology on the new performance dimension. Later, we extend our game to a dynamic one and show that the context-dependent preferences may cause the pioneer to innovate less.

Price and quality competition with quality positions

“…Firm L then captures a greater market share with its reasonable low‐end product. Although the result is derived from a simple model, it coincides with the well‐known observation that an established high‐positioned firm is eventually overcome by a newcomer that offers a reasonable low‐end product (Chen & Turut, ; Christensen, ).…”

Disruptive innovation from a process view: A systematic literature review

“…If the innovation is successfully launched into the niche market, the entrant subsequently improves the innovation along the new and other performance attributes valued by mainstream customers. Which performance attributes are improved depends on the entrant's strategy (Chen & Turut, ) and the niche customers' demand trajectory (Adner, ). Due to resource constraints, the entrant decides whether to focus on improving the new performance attributes or the mainstream's performance attributes (Chen & Turut, ), which influences the innovation's future direction.…”

Consumer Uncertainty and Purchase Decision Reversals: Theory and Evidence

“…Our research also adds to the growing body of multimethod research that develops analytical models incorporating behavioral theory and empirically tests the model predictions (e.g., Jain 2005, 2010;Cui and Mallucci 2013). Specifically, we incorporate the behavioral theory of reference-dependence to the analytical model, a theory that has been shown to be successful in analyzing blocks in a price contract (Lim and Ho 2007), framing a fixed fee (Ho and Zhang 2008), the labor supply (Farber 2008), product line design (Orhun 2009), newsvendor models (Ho et al 2010), and innovation strategy (Narasimhan andTurut 2013, Chen and. This paper provides further evidence that modeling referencedependency can have a substantive impact on the effectiveness of the marketing mix elements.…”