Optimal temporal product introduction strategies under valuation changes and learning

Abstract

Consider a firm facing two consumer segments with differing valuations for quality. The demand is stationary and known, and consumers make repeat purchase over two time periods. However, once a premium product is introduced, the valuations of the consumers change in the next period. The firm derives a cost savings due to learning effect in the second period, the magnitude of which depends on the sales volume in the first period. Under such a situation, should a firm introduce a premium product before a basic product or the vice versa? Should it introduce two products simultaneously? When should a firm expand or consolidate its product line? What is the optimal product introduction strategy for a firm? Using a two-period stylized model we seek to answer these questions. We characterize the optimal product introduction strategy for the firm. We describe three easily calculable parameters that govern the optimal choice of the firm. The conditions under which a firm should expand or consolidate its product line are discussed. We study the effects of cost savings and customer valuation changes. We show that the dominated product strategies in absence of these effects can be a part of an optimal product strategy of a firm under valuation changes and cost savings. The managerial implications of the model are discussed.