Sreekumar R. Bhaskaran

Effort, Revenue, and Cost Sharing Mechanisms for Collaborative New Product Development

The growing sophistication of component technologies and the rising costs and uncertainties of developing and launching new products require firms to collaborate in the development of new products. However, the management of new product development that occurs jointly between firms presents a new set of challenges in sharing the costs and benefits of innovation. Although collaboration enables each firm to focus on what it does best, it also introduces new issues associated with the alignment of decisions and incentives that have to be managed alongside conventional performance and timing uncertainties of new product development. In this paper, we conceptualize and formulate the joint development of products involving two firms with differing development capabilities and examine the implications of arrangements that go beyond sharing of revenues to include sharing of development cost and work. We term these approaches that involve sharing of the development cost and sharing of the development work investment sharing and innovation sharing, respectively. These cost and effort sharing mechanisms have subtle interactions with the degree to which revenues are shared between firms and the type of development project under consideration. Our analysis shows that investment and innovation sharing are particularly relevant for products with no preexisting revenues, and their benefits also depend on the degree to which revenues are shared between the firms. Whereas investment sharing is more attractive for new-to-the-world product projects with significant timing uncertainty, innovation sharing plays an important role in environments where projects experience product quality uncertainty, firms are similar in their capabilities, and the costs of integration of work across firms can be controlled. Our key contribution involves the modeling of joint work and decision making between collaborating firms and unearthing the complementary role of revenue, cost, and innovative effort sharing mechanisms for new product development. We translate our analytical findings into a managerial framework and illustrate the results with examples from the life-sciences and electronics industries.

Selling and Leasing Strategies for Durable Goods with Complementary Products

It has been recognized that when a durable goods manufacturer sells its output, it has an incentive to produce at a rate that will drive down the market price of the product over time. Because anticipation of declining prices makes consumers less willing to invest in owning the durable good, selling can be self-defeating for the manufacturer. If the manufacturer instead leases the product, it can eliminate its own incentive to decrease the price over time, which allows it to extract larger rents from consumers. In this paper, we investigate how a durable goods manufacturers choice between leasing and selling is affected by a complementary product that is produced by an independent firm. We show that a durable goods manufacturer that leases its product has an incentive to increase prices (by limiting the availability of the product) in response to the availability of a complement. Because this potential for opportunistic behavior discourages output of the complement, leasing can also be problematic. As a result, the durable goods manufacturer faces a trade-off between leasing, which commits the manufacturer to not overproduce, and selling, which commits it to not underproduce. Our contribution is to identify this trade-off and show how a durable goods manufacturer can use a combination of leasing and selling to balance its strategic commitment across both its own market as well as the complementary market.

Implications of Channel Structure for Leasing or Selling Durable Goods

In spite of the fact that many durable products are sold through dealers, the literature has largely ignored the issue of how product durability affects the interactions between a manufacturer and her dealers. We seek to fill this gap by considering a durable goods manufacturer that uses independent dealers to get her product to consumers. In contrast to much of the literature, we specifically consider the possibility that if the manufacturer sells her product, then the dealers can either sell or lease it to the final consumer. One of our more interesting findings is that, when the level of competition among dealers is high, the manufacturer prefers to use a lease-brokering arrangement in which the dealers earn a margin for brokering leases between the manufacturer and end consumers, instead of selling her product to the dealers. This complements existing results that show that when suppliers of durable goods interact directly with consumers, selling is the dominant strategy for high levels of competitive intensity.

Managing Technology Selection and Development Risk in Competitive Environments

Managing development decisions for new products based on dynamically evolving technologies is a complex task, especially in highly competitive industries. Product managers often have to choose between introducing an incrementally better, safe new product early and a superior, yet highly risky, product later. Recommendations for managing such performance vs. time-to-market trade-offs often ignore competitive reactions to development decisions. In this paper, we study how a firm could incorporate the presence of a strategic competitor in making technology selection and investment decisions regarding new products. We consider a model in which an innovating firm and its rival can introduce a new product immediately or pursue a more advanced product for later launch. Further, the firm can reduce the uncertainty surrounding product development by dedicating more resources; the effectiveness of this investment depends on the firms innovative capacity. Our model generates two sets of insights. First, in highly competitive industries, firms can adopt different technologies and effectively use introduction timing to mitigate the effects of price competition. More importantly, the firm could strategically invest in the advanced product to influence its rivals technology choice. We characterize equilibrium development and investment decisions of the firms, and derive innovative capacity hurdles that govern a firms choice between the risky and safe alternatives. The effects of development flexibility—where firms might have the option to revert to the safe product if the advanced product fails—are also considered.

Consumer Mental Accounts and Implications to Selling Base Products and Add-ons

Firms in a variety of industries offer add-on products to consumers who have previously purchased a base product. We posit that consumers, in making their decisions as to whether to purchase add-ons that complement the base products, find a greater need for the value offered by the add-ons when the “unrecovered” value (i.e., price paid minus the benefits obtained so far) associated with the base products is higher. We conduct experiments that test the proposed hypothesis and examine the strategic implications of such consumer decision making to a firm that sells base product add-on pairs. Consistent with our hypothesis, the experiments show that a consumers unrecovered value associated with the base product is positively correlated to his likelihood of purchasing the add-on. Formal modeling of this bias shows that firms may find penetration pricing strategies (such as loss leader pricing) suboptimal. Furthermore, the identified bias leads the firm to spend more resources toward enhancing both the base product and the add-on quality, especially so when the add-on will be offered before the consumer has a chance to extensively use the base product. Finally, the effect of competition in the base product market is also considered.

A Dynamic Inventory Model with the Right of Refusal

We consider a dynamic inventory (production) model with general convex order (production) costs and excess demand that can be accepted or refused by the firm. Excess demand that is accepted is backlogged and results in a backlog cost whereas demand that is refused results in a lost sales charge. Endogenizing the sales decision is appropriate in the presence of general convex order costs so that the firm is not forced to backlog a unit whose subsequent satisfaction would reduce total profits. In each period, the firm must determine the optimal order and sales strategy. We show that the optimal policy is characterized by an optimal buy-up-to level that increases with the initial inventory level and an order quantity that decreases with the initial inventory level. More importantly, we show the optimal sales strategy is characterized by a critical threshold, a backlog limit, that dictates when to stop selling. This threshold is independent of the initial inventory level and the amount purchased. We investigate various properties of this new policy. As demand stochastically increases, the amount purchased increases but the amount backlogged decreases, reflecting a shift in the way excess demand is managed. We develop two regularity conditions, one that ensures some backlogs are allowed in each period, and another that ensures the amount backlogged is nondecreasing in the length of the planning horizon. We illustrate the buy-up-to levels in our model are bounded above by buy-up-to levels from the pure lost sales and pure backlogging models. We explore additional extensions using numerical experiments.

Managing Technology Uncertainty Under Multi-Firm New Product Development

The growing sophistication of component technologies and the rising costs of product development require firms to collaborate in the development of new products by pooling their resources and entering into resource or cost-sharing arrangements. However, the management of new product development that occurs jointly between a technology supplier and its industrial customer presents a new set of challenges. While such vertical collaboration enables each firm to focus on what it does best and achieve certain economies of specialization, it also introduces new issues associated with the alignment of decisions and incentives that have to be managed alongside conventional performance and timing uncertainties of new product development. In this paper, we conceptualize and formulate the co-development of products involving two firms and examine the implications of two collaboration mechanisms found in industrial practice. We term these approaches which involve sharing of the development cost and sharing of the development work, investment sharing and innovation sharing, and find that they have subtle effects on the degree of product innovation and profits of individual firms, depending on the nature and extent of technological uncertainty, product development cost structure, and complementary relationships with other products. We consider both exogenous and endogenous technology uncertainty, and study the impact of investment and innovation sharing on a firms technology consideration set, product qualities, and profits. Conditions under which firms should consider one mechanism over the other and over single firm product development are proposed. Our analysis shows that, while investment sharing plays an important role in environments with higher levels of technology uncertainty, innovation sharing can result in greater quality improvements and profits if firms are able to manage the distributed product development process more efficiently. We translate our analytical findings into a managerial framework and illustrate it with examples from the industry.

An Economic Analysis of Customer Co-design

A key barrier to companies successfully engaging customers in the design of new products is customers fearing that they will be forced to pay much more for the custom products they help design. This fear is justified by the fact that once the customer has invested significant time and effort in co-designing a product, the firm can extract the entire consumer surplus through higher prices. At the same time, the firm allowing its customers to co-design products would be unlikely to commit to a price up front before knowing the complete design of the custom product, since it would then face a significant risk of losing money. In this paper, we develop analytical models for this problem, and show how a firm can motivate its customers to engage in co-design. We also show how offering co-design can impact the firm’s product (line) strategies and the quality of its products, including motivating the firm to increase the quality of its standard product, sometimes even beyond the efficient quality level. The effec...

Search and Authentication in Online Matching Markets

Compared to offline matching markets, online matching platforms improve search in the matching process, but at the same time, increase the problem of authenticating the features and credentials of prospective matches. This paper examines the interplay between these two processes in online matching, using game-theoretic models. We examine whether an online matching platform should target a broad market of match-seekers or an exclusive group of high-value match-seekers, and how the platform should price its search and authentication services. Our results provide valuable insights for online matching platforms regarding the decision to offer authentication services in addition to search services, and guidelines for the pricing and positioning of these services. For instance, we show that the complementarity of the platform’s optimal pricing for search and authentication services can lead to the platform offering an authentication service as a loss leader, and that higher quality authentication services may not justify higher authentication fees. We also develop guidelines for the platform’s optimal strategies for different market conditions.