Product Diversity in Asymmetric Oligopoly: Is the Quality of Consumer Goods too Low?

We analyse an oligopoly model incorporating horizontal differentiation and quality differences. High quality goods are overpriced and underproduced. When the market is fairly well covered, low quality products may be profitable when their net social contribution is negative, implying excessive entry. In a relatively uncovered market, even low quality goods are underproduced and there may be underentry. When fixed costs are independent of quality, the market tends to select the right firms. Otherwise, the market may produce low quality products when it should produce high quality ones. The model is calibrated using market data for yoghurt.     

Making Up Is Hard to Do: Knowledge Acquisition Strategies and the Nature of New Product Innovation

Innovation creates significant challenges for firms in high‐technology industries. This article examines how the use of external knowledge acquired from mergers and acquisitions (M&As) and joint ventures (JVs) influence the nature of innovative competence in the global pharmaceutical industry. We create a unique database on never‐before approved products that measure the scientific merit of new, exploratory product innovations, ranging from radical to incremental. We then follow their market success by recording the number of new exploitative product innovations that stem from these product innovations and that are later approved and subsequently marketed. Using a large data set spanning a 15‐year period, we find that firms were able to “make up” for their lack of exploitation or exploration innovative capabilities through the use of M&As and JVs. These external knowledge acquisition strategies were found to overcome internal processes that otherwise could cause firms to overemphasize exploitation over exploration and vice versa. Our findings suggest that acquiring external knowledge via M&As is associated with diminished exploratory product innovation, while assimilating external knowledge sourced from JVs is associated with a reduction in new exploitative product innovation.     

Waiting to Default: The Value of Delay

This paper analyzes the opportunity for early termination of a mortgage contract. We consider the possibility of defaulting on the property and explore the rules that are used by a value-maximizing borrower in exercising this option to default. The discussion centers on the value of waiting to make such a decision and the consequences of this rational inertia. We show that the observed delay in default usually attributed to transaction costs can instead be explained as entirely rational choice in a dynamic environment.     

Seeing Is Believing (Too Much): The Influence of Product Form on Perceptions of Functional Performance

The present research investigates the manner in which product form communicates functional performance, and examines how the form of a product can alter judgments about feature function. In a series of experiments, product form is pitted against objective information about feature function to understand how conflicting visual and verbal cues are reconciled. The findings indicate that when a product's form suggests a particular level of functional performance, consumers naturally incorporate that information into judgments of feature performance, even when presented with conflicting feature information from an objective source. The role of consumer attention in the process is also explored. The results suggest that product developers may be able to improve perceived performance by focusing design efforts and marketing communications on specific features that visually communicate functionality.     

The Story Is As Good As the Real Thing: Early Customer Input on Product Applications of Radically New Technologies

Early customer input on applications that use radically new technologies is crucial for gaining an understanding of the benefits and value of these new technologies. Potential customers should have a clear understanding of a new technology application before they give their input on it. Prototypes provide a clear picture to the customer, but are seldom available in the early (predevelopment) stage. Therefore, a customer research technique that provides valuable input is needed. The aim of the study is to show that product narratives provide valuable input from customers in the predevelopment phase of a discontinuous new product development (NPD) process. This study compares a product narrative with a benchmark condition of a working prototype, a nonnarrative, and two conditions that have been added to make a comparison possible. Confirming this study's prediction, the analysis of variance results show that no differences are present between the narrative text with drawn images and a prototype demonstration on all dependent variables (i.e., evaluations of the product, interaction, ease of use, and aesthetics). Differences in customers' evaluations are only present when the narration is removed from the text with drawn images. Regression analysis confirms that narration is the key variable that predicts the evaluations of the product, interaction, ease of use, and aesthetics. The mediating role of narrative transportation provides explanation of these findings. Narrative transportation is a mixture of attention, imagery, and feelings that people experience when they watch a movie or read a narrative. According to narrative transportation theory, transported consumers immerse themselves in what they watch or read and have vivid images in their mind, see themselves in the scene of the action, experience emotions, and forget the world around them. This study shows that without narration, texts with drawn images are insufficiently vivid to transport the reader to enable him or her to imagine using the really new product, and consequently, provide evaluations similar to prototype evaluations. The narrative character of the utilized technology application presentation provides vivid imagery of the technology application, thereby compensating for a lack of realism. To conclude, an easy‐to‐apply product narrative successfully explains a technology application that uses a radically new technology to a customer before prototypes have been completed.     

Seeking Simplicity in Complexity: The Relative Value of Ease of Use (EOU)‐Based Product Differentiation

Models of category acceptance and diffusion, including Davis's technological acceptance model (TAM), have established that ease of use (EOU) is a significant determinant of technological product adoption. This supports user‐centered design philosophies, where aspects of cognitive attractiveness (e.g., logical to use) and emotional attractiveness (e.g., lack of frustration in use) are essential, and contrasts traditional design practices where physical attractiveness dominates concern. These studies consider the impact of EOU on category (primary) demand. It is unclear whether firms should incorporate EOU into design and positioning strategies to differentiate their products from others in the same category that perform better on functional features. A random utility theory‐based choice model is used to measure the relative value of EOU. In a new product category (DVD recorders; n = 496) and one that is more established (cell phones; n = 202), consumers were found to forgo functional features in preference for products better rated on EOU. With implications for segmentation, those seeking simplicity were older, female, educated, and with less product knowledge, while those already owning a complex phone made replacement decisions with less concern for EOU. The findings support EOU‐based differentiation strategies as a legitimate alternative to other forms of differentiation.     

Opening Networks to Competition: The Regulation and Pricing of Access. David Gabel and David Weiman

Review of Industrial Organization -     

New Product Development Structures: The Effect of Customer Overload on Post-Concept Time to Market

In corporate policy statements, seminars, journal articles—even in television commercials—the message comes through loud and clear: To remain competitive, we must do a better job of listening to our customers. Through close contact with customers, designers can more accurately identify market requirements, quickly refine product specifications, and thus reduce time to market. However, too much customer input can create confusion and duplication of effort, which ultimately increases time to market. In other words, some firms run the risk of over-listening to their customers. In a study of three global players in the electronic component industry, Srikant Datar, Clark Jordan, Sunder Kekre, Surendra Rajiv, and Kannan Srinivasan explore the effects of having too much input from customers. Specifically, they examine the relationship between a company's new product development structure and the volume of customer input, which in turn can affect time to market. The high-tech, fast-cycle firms examined in this study employ two distinct new product development structures: concentrated and distributed. A concentrated structure locates all product designers in one facility. This facilitates cross-product learning among designers, but limits designers' contact with customers and process engineers. A distributed structure disperses new product development among numerous manufacturing sites, giving designers close contact with customers and process engineers. However, a distributed structure limits designers' opportunities for cross-product learning. Analysis of 220 new product efforts reveals that the distributed structure offered a time-to-market advantage as long as these firms efficiently managed the level of customer interaction. When designers received input on the product design from no more than 25 customers, the distributed structure provided shorter time to market than the concentrated structure. Beyond the 25-customer level, time-to-market performance of the distributed structure degraded quickly and at an increasing rate. In such cases, more effective management of customer interaction might allow firms employing a distributed structure to enjoy the benefits not only of customer input, but also of improved coordination between product designers and process engineers.     

How to Count Patents and Value Intellectual Property: The Uses of Patent Renewal and Application Data

Patent counts are very imperfect measures of innovative output. This paper discusses how additional data—the number of years a patent is renewed and the number of countries in which protection for the same invention is sought—can be used to improve on counts in studies that require a measure of the extent of innovation. Simple weighting schemes are proposed, which may remove half of the noise in patent counts as a measure of innovative output. We describe models of the patent application and renewal processes whose parameter estimates can be used to assess the value of the proprietary rights created by the patent laws. We illustrate their use with estimates of how the value of patent protection would vary under alternative legal rules and renewal fees and with estimates of the international flows of returns from the patent system. Recent progress in the development of databases has increased the potential for this type of analysis.     

The Value of Access to Rail Transit in a Congested City: Evidence from Housing Prices in Beijing

Using unique data sets of Beijing's congestion patterns and housing prices, I find that consumers are willing to pay significantly more for access to rail transit in more congested areas. Transit accessibility, however, offers little travel advantage outside of dense urban areas. The expansion of the metro network mitigates the costs of road congestion, creating both private and social benefits. Two policy initiatives aimed at reducing congestion are found to have achieved positive value effects. Further analysis reveals heterogeneous demand for accessibility, with wealthier residents and those owning fewer cars paying a higher premium for access to rail transit.     

Linking Product Development Outcomes to Market Valuation of the Firm: The Case of the U.S. Pharmaceutical Industry*

The purpose of this research was to examine empirically the effects of new product development outcomes on overall firm performance. To do so, first product development and finance literature were connected to develop three testable hypotheses. Next, an event study was conducted in order to explore whether the changes in the stock market valuation of firms are influenced by the outcomes of efforts to develop new products. The pharmaceutical industry was chosen as the empirical context for the present study's analysis largely because the gate‐keeping role played by the Food and Drug Administration (FDA) provides a specific event date on which to focus the event study methodology. As such, this study's events were dates of public announcements of the FDA decisions to approve or to reject the New Drug Applications submitted by the sponsoring firms. Consistent with the efficient market hypothesis, this study's results show that market valuations are responsive strongly and cleanly to the success or failure of new product development efforts. Hence, one of this study's key results suggests that financial markets may be attuned sharply to product development outcomes in publicly traded firms. This study also finds that financial market losses from product development failures were much larger in magnitude than financial market gains from product development successes—indicating an asymmetry in the response of financial markets to the success and failure of new product development efforts. Hence, another implication of this study's results is that managers should factor in a substantial risk premium when considering substantial new development projects. The present study's results also imply that managers should refrain from hyping new products and perhaps even should restrain the enthusiasm that the financial community may build before the product fully is developed. The effect on firm value is severe when expectations about an anticipated new product are not fulfilled. Managers in effect should take care to build reasonable and realistic expectations about potential new products.     

The Ability to Minimize the Timing of New Product Development and Introduction: An Examination of Antecedent Factors in the North American Automobile Supplier Industry

The importance of overall timing in the new product development and the new product commercialization processes has been widely recognized in the literature. We examined 14 firm-level practices, later reduced to four factors, that influence the ability to minimize new product development and introduction times overall relative to competitors. The factors are (1) human resource management, (2) synergistic integration, (3) supplier closeness, and (4) the design-manufacturing interface. An empirical study of the North American automobile supplier industry found some support for the four-factor model of antecedents to timing ability: synergistic integration and supplier closeness were both significantly related to development and introduction time minimization ability. The implications of these findings for product development managers and academic researchers are discussed.