ENDOGENOUS COSTS AND PRICE‐COST MARGINS: AN APPLICATION TO THE EUROPEAN AIRLINE INDUSTRY*

This paper allows for endogenous costs in the estimation of price cost margins. In particular, we estimate price‐cost margins when firms bargain over wages. We extent the standard two‐equation set‐up (demand and first‐order condition in the product market) to include a third equation, which is derived from bargaining over wages. In this way, price‐cost margins are determined by wages and vice versa. We implement the model using data for eight European airlines from 1976–1994, and show that the treatment of endogenous costs has important implications for the measurement of price‐cost margins and the assessment of market power. Our main result is that observed prices in Europe are virtually identical to monopoly prices, even though observed margins are consistent with Nash behavior. Apparently, costs had been inflated to the point that the European consumers were faced with a de facto monopoly prices.     

Surviving the gales of creative destruction: the determinants of product turnover

Innovative industries are often characterized by rapid product turnover. Product longevity may be driven by both a product's position within a market as well as its position within a firm's larger product portfolio. However, we have little understanding of the relative importance of these factors in determining product turnover and how they interact as an industry evolves. Although researchers have invested substantial effort in analyzing firm survival and turnover, there are far fewer studies of the determinants of product survival and turnover. We use hazard rate models and count regression models to describe the behavior of firms and their products with a new and detailed database on the laser printer industry. We show, first, that competition and market structure variables have a large impact on both speeding product exit and delaying product entry. Second, there is some evidence that firms that have maintained a high market share for a number of years keep their products on the market longer than those with lower market share. Finally, firms with high innovative capacity tend to enter markets frequently, but withdraw their products at average rates. Firms with strong brands tend to introduce few products and withdraw their products slowly. With these findings, the paper links product entry and exit decisions to the broader literature on firm strategic and product management. Copyright © 2006 John Wiley & Sons, Ltd.     

Behavioral Reasons for New Product Failure: Does Overconfidence Induce Overforecasts?

Efforts to organize and integrate research findings on new product performance determinants have lagged since the last significant overview paper appeared over a decade ago. Importantly, this literature has not considered entire categories of factors that are known to affect managerial decisions and behavior, namely those that pertain to decision‐makers' cognitive limitations and incentive structures. This research empirically investigates one specific cognitive distortion heretofore neglected in studies of new product commercialization—overconfidence, commonly defined in the literature as excessive belief in one's own abilities to generate superior performance. To lay the groundwork for subsequent exploration, the paper first introduces a behavioral model that both organizes well‐understood new product performance determinants and illuminates others heretofore not studied, namely incentive alignment and cognitive limitations and biases. The model summarizes extant research and allows development of research hypotheses related to overconfidence. The hypotheses and empirical investigation motivated by the model address two questions about the impact of overconfidence on new product commercialization activities. First, the study explores whether overconfidence is associated with overforecasting new product demand. Second, it evaluates two complementary mechanisms that may account for overconfidence‐induced overforecasts. The empirical findings are based on data generated in the course of management simulation workshops conducted among graduate students at three leading business schools in India. Three hundred thirty participants played individually four rounds of a computer‐based simulation game that involved decisions pertaining to new product development (including product formulation) and commercialization strategies. The decisions were captured and analyzed using statistical techniques. The results reveal that decision‐makers' overconfidence is associated with a higher likelihood of overforecasting new product sales. The observed effect is fully mediated by flawed tactical decisions that dampen demand, namely elevated product pricing. Sensitivity analyses show that these results are robust to a number of alternative explanations. However, the study finds no evidence implicating overconfident individuals as poor “innovators”—overconfident and nonoverconfident decision‐makers experienced comparable market demand for their new products. The paper concludes with a discussion of the results and provides specific recommendations for practice.     

Structural and contextual correlates of charged behavior in product development teams

Firms increasingly use cross‐functional teams to develop new products, yet we know little about the processes that make teams excel. Although studies have focused on within‐team processes like cooperation between and integration of individuals from various functional areas, some emerging literature suggests that the processes that make teams excel are richer and more complex than cooperation and integration. In order to capture the processes that lead to excellent market performance of new products, we introduce the concept of charged team behavior, the extent to which cross‐functional product development teams are enthusiastically and jointly driven to develop superior new products. Charged team behavior captures not only the drive, commitment, and joy of team members, but also their collaborative behaviors to achieve an exceptional outcome. We propose and test a series of hypotheses concerning how charged behavior affects new product market performance and how charged behavior is, in turn, influenced by both team structural characteristics (physical proximity, team longevity, and outcome interdependence) and contextual factors (senior management encouragement to take risk, quality orientation, exposure to customer input, extent of competition, and interdepartmental connectedness). It is particularly important to examine the antecedents of charged behavior because there are concerns that some of the team‐related factors generally considered to be useful for teams may not necessarily lead to charged teams. Data from new consumer product development teams is analyzed though structural equation modeling for hypothesis testing. We find evidence that highly charged teams are more likely to develop successful new products. Results also indicate that outcome interdependence, exposure to customer input, extent of competition, and interdepartmental connectedness are positively related to charged behavior. Physical proximity, team longevity, encouragement to take risk, and quality orientation do not improve teams' charged behavior. Data suggests that charged team behavior: 1) fully mediates the effects of outcome interdependence and interdepartmental connectedness on performance, 2) partially mediates the influence of exposure to customer input and the extent of competition on performance, and 3) does not mediate the effects of quality orientation and physical proximity on performance. Our study highlights the importance of creating highly charged product development teams in order to achieve exceptional performance. Further, our results indicate that some of the factors suggested by traditional social psychology research for enhancing team effectiveness (e.g., physical proximity and team longevity) may not necessarily create charged teams. Instead, charged teams need a special arrangement, in which members are accountable to the team and where their evaluations and rewards are also linked to the performance of the team. In addition, although a strong emphasis on quality is considered to be beneficial for new products, as our results indicate, such emphasis cannot create a charged atmosphere. Moreover, our research suggests that if the organization structure does not permit frequent contact between individuals across functional boundaries, the creation of a strongly charged team and development of a successful new product will be hindered.     

Efficient versus Responsive Supply Chain Choice: An Empirical Examination of Influential Factors

Contemporary strategies in operations management suggest that successful firms align supply chain assets with product demand characteristics in order to exploit the profit potential of product lines fully. However, observation suggests that supply chain assets often are longer lived than product line decisions. This suggests that alignment between supply chain assets and demand characteristics is most likely to occur at the time of initial market entry. This article examines the association between product demand characteristics and the initial investment in a supply chain at the time of market entry. We characterize supply chains as responsive or efficient. A responsive supply chain is distinguished by short production lead‐times, low set‐up costs, and small batch sizes that allow the responsive firm to adapt quickly to market demand, but often at a higher unit cost. An efficient supply chain is distinguished by longer production lead‐times, high set‐up costs, and larger batch sizes that allow the efficient firm to produce at a low unit cost, but often at the expense of market responsiveness. We hypothesize that a firm's choice of responsive supply chain will be associated with lower industry growth rates, higher contribution margins, higher product variety, and higher demand or technological uncertainty. We further hypothesize that interactions among these variables either can reinforce or can temper the main effects. We report that lower industry growth rates are associated with responsive market entry, but this effect is offset if growth occurs during periods of high variety and high demand uncertainty. We report that higher contribution margins are associated with responsive market entry and that this effect is more pronounced when occurring with periods of high variety. Finally, we report that responsive market entry also is correlated positively with higher technological demand uncertainty. These results are found using data from the North American mountain bike industry.     

MARKET PERFORMANCE WITH MULTIPRODUCT FIRMS*

We revisit the fundamental issue of market provision of variety associated with Chamberlin, Spence, and Dixit‐Stiglitz when firms sell multiple products. Both products and firms are (horizontally) differentiated. We propose a general nested demand framework where consumers first decide upon a firm then which variant to buy and how much (the nested CES is a special case). We use it to determine the market's biases when firms compete in product ranges and prices. The market system attracts too many firms with too few products per firm: firms restrain product ranges to relax price competition, but this exacerbates over‐entry.     

Biases in demand analysis due to variation in retail distribution

Aggregate demand models typically assume that consumers choose between all available products. Since consumers may be unwilling to search across every store in a given market for a particular item, this assumption is problematic when product assortments vary across stores. Using supermarket scanner data for five product categories we demonstrate that approximately one third of products have limited retail distribution, which account for one fourth of dollar sales. Monte Carlo analysis demonstrates that the level of limited product availability observed in the data can significantly bias the results of aggregate demand models that incorrectly assume all consumers in a given market face the same choice set.     

Curbing obfuscation: Empower consumers or regulate firms?

This paper develops a market model where consumers refrain from buying products that they are unable to understand and a firm can influence the probability of a consumer understanding its offer. In equilibrium, firms artificially increase product complexity, and firms that offer more transparent products choose on average higher prices. We study two sets of public policies. We show that consumer side policies may have the unintended consequence of encouraging obfuscation while firm side policies are always effective in curbing obfuscation. Interestingly, a consumer side policy can even harm consumers when it protects consumers so much that it greatly increases the marginal effectiveness of obfuscation. Policies on both sides can either increase or decrease social welfare depending on the marginal effectiveness and the marginal cost of obfuscation. Our main insights hold in both asymmetric and symmetric obfuscation equilibria.     

Anti‐Competitive Interconnection: the effects of the elasticity of consumers' expectations and the shape of the network effects function

I find that interconnection might cause the market to be less competitive, and might lead to an increase in the price firms charge for their product. Absent interconnection, firms compete for a consumer for two reasons. The first reason is to obtain revenue from selling the product to a consumer (as in the case without network effects). The second reason is that by expanding the network by one more consumer, the product becomes more attractive to all other consumers. Interconnection eliminates the second reason—when firms interconnect, they are no longer concerned with consumers' following the crowd. I show that consumers and society might be worse off from interconnection. I focus on two factors that make the (post‐interconnection) price increase larger: consumer expectations that are highly sensitive to prices and consumers putting a high value on small increases in network size at the equilibrium market shares. Both of these factors make firms highly competitive, but only if the firms' products' networks are not interconnected.     

Information in Launch Messages: Stimulating the Adoption of New High‐Tech Consumer Products

This research investigates how the adoption of new high‐tech consumer products can be stimulated by communicating product‐related information in launch messages. In an initial pilot study, the authors find that for making an adoption decision, consumers require different types of product‐related information, i.e., technical information, financial information, and personal/social information. In three experiments, the authors then examine how adoption intention and behavior is affected by communicating these information types. The first experiment shows that communicating personal/social information results in the highest adoption intention. This effect is moderated by the way in which the information is represented in the message. Adoption intention is highest when personal/social information is communicated in an abstract manner, while financial and technical information are most effective when communicated in a concrete manner. The second experiment shows that the effects hold for actual adoption behavior. In addition, visual imagination is found to mediate these effects. In the last experiment, visual imagination is directly manipulated by thematic priming and has a direct effect on adoption behavior. The results emphasize that activating the imagination in a product‐relevant situation stimulates adoption behavior.     

政府补贴对再制造闭环供应链的影响研究

本文在考虑消费者支付意愿存在显著差异、消费者和制造商存在不同政府补贴分配比例下,建立再制造博弈模型,探讨政府补贴再制造品对产品价格、需求以及对消费者、制造商、社会总收益的影响。结论表明,政府补贴有利于促进再制造品的需求,消费者剩余效用、制造商收益以及社会总收益都增加;政府补贴时应不允许制造商涨价,在考虑制造商积极性下尽量补贴给消费者;提高消费者环保意识才是促进再制造的根本途径。     

Dynamic Product Diversity

This paper examines the frequency of new product introductions in monopoly markets where demand is subject to temporary satiation. Consumers' taste for diversity is satisfied over time as new varieties are introduced to the market. If two varieties are introduced in consecutive periods then they become imperfect substitutes and the firm has an incentive to raise prices and sell each one to consumers with higher valuations (better preference matching). Higher frequency can also generate market expansion. However, under strong temporary satiation, better preference matching may dominate and the frequency of new product introductions may become socially excessive.     

Enhancing New Product Adoption at the Base of the Pyramid: A Contextualized Model

Companies are recognizing and pursuing the opportunity to serve the market known as the base of the pyramid (BOP), i.e., consumers who live in poverty in developing countries. The BOP constitutes the largest remaining global market frontier for businesses. Until recently, it has been ignored because of its seeming unattractiveness and insurmountable challenges compared with middle‐ and high‐income markets. However, BOP consumers desire and are able to pay for quality products tailored to their needs. In response, firms are developing new products specific to the demands and conditions of this low‐income population. To innovate effectively, ensuring new products are well received, firms need to know how to enhance new product adoption among these consumers despite the barriers of poverty. We address this need by developing a model of adoption contextualized to the BOP. Based on theories of innovation and poverty, and drawing on the emergent subsistence market literature, we propose that certain new product characteristics, social context dynamics, and marketing environment approaches moderate or counter some of the limits of poverty, making adoption possible. We then discuss the managerial and theoretical implications of our model for innovation practitioners and researchers.     

Product Choice and the Importance of Aesthetic Design Given the Emotion‐laden Trade‐off between Sustainability and Functional Performance

This paper investigates the trade‐off decision that consumers face when choosing between a product that is perceived to be more sustainable (i.e., more socially and environmentally responsible) and another product that instead is perceived to offer superior functional performance. Prior research has demonstrated that consumers often believe that there is a trade‐off between sustainability and performance, and in some cases, this trade‐off may be real and not just perceived. The objectives of the current research are to understand the mediators and moderators of this trade‐off choice and to illustrate one specific way in which to use this understanding to promote the consumption of relatively more sustainable products despite a perceived performance trade‐off. Two separate studies were conducted. The first employed a student‐based sample, whereas the second employed a nationally representative online sample. In both studies, participants were presented with a choice between two consumer products. One product was depicted as having superior sustainability characteristics (and average functional performance), and the other product was depicted as having superior functional performance (and average sustainability characteristics). Participants were asked to imagine that they were leaning toward choosing one product over the other, and then rated the degree to which they were feeling a set of possible emotions. Following these ratings, participants chose one of the products. The results suggest that consumers presented with such a trade‐off will tend to choose the product with superior functional performance over the product with superior sustainability characteristics, due to feelings of distress, until a minimum threshold of functional performance is achieved. The current research also shows that choice given this trade‐off depends upon the degree to which consumers value sustainability that, in turn, is mediated by consumers’ feelings of confidence and guilt. Further, based on an understanding of the emotions mediating choice in this context, the authors demonstrate how the effective use of product aesthetic design can improve the relative choice likelihood of sustainable products. Specifically, the authors demonstrate that superior aesthetic design has a disproportionately positive effect on the choice likelihood of sustainability‐advantaged (versus performance‐advantaged) products due to the effect that superior aesthetic design has on overcoming the potential lack of confidence in sustainable products. These findings highlight the specific value of aesthetic product design in the context of marketing sustainable products and suggest that it is especially important for firms interested in marketing sustainable products to also develop market‐leading product aesthetic design capabilities.     

The Effects of Market Network Heterogeneity on Innovation Diffusion: An Agent‐Based Modeling Approach

Innovations usually have an initial impact on very few people. The period of learning or early evaluation precedes the diffusion of the technology into the wider addressed population. More than a transfer, this is best characterized as communication of benefits, costs, and compatibility with earlier technologies and a relative assessment of the new state of the art. Innovation development by an organization or individual creates not just a device (i.e., process or tacit knowledge) but concomitantly a capacity on the part of other organizations or persons to use, adopt, replicate, enhance, or modify the technology, skills, or knowledge for their own purposes. How innovations actually diffuse is to understand the communication of progress, and this framing helps one to design innovations and also design the marketing and testing programs to ready innovations for market and launch them efficiently. Diffusion theory's main focus is on the flow of information within a social system, such as via mass media and word‐of‐mouth communications. This theory presents often in the form of mathematical models of innovation and imitation. Distinct from classical diffusion models, however, consumers are not all identical in how they connect to others within a market or how they respond to information. We examine the effects of various network structures and relational heterogeneity on innovation diffusion within market networks. Specifically, network topology (the structure of how individuals in the market are connected) and the strength of communication links between innovator and follower market segments (a form of relational heterogeneity) are studied. Several research questions concerning network heterogeneity are addressed with an agent‐based modeling approach. The present study's findings are based on simulation results that show important effects of network structure on the diffusion process. The ability to speed diffusion varies significantly according to within‐ and cross‐segment communications within a heterogeneous network structure. The implications of the present approach for new product diffusion are discussed, and future research directions are suggested that may add useful insights into the complex social networks inherent to diffusion. A simple summary is that discovery of significant prime communicator nodes in a network allows innovation development practices to be better calibrated to realistically multiple market segments.     

Resale price maintenance for supply chains distributing products with demand uncertainty

This paper explores the economic roles of resale price maintenance (RPM) in supply chains for a specific product, when consumers have taste heterogeneity and the manufacturer faces demand uncertainty. Two transaction schemes within supply chains are compared: (1) RPM, and (2) decentralized pricing in a competitive market environment. With decentralized pricing, a manufacturer loses the incentive to produce a product in categories where the probability that the manufacturer fails to design the product as suitable to public tastes of consumers is high. However, RPM resolves the problem and induces the manufacturer to supply the good, bringing positive surplus to consumers.     

Will It Spread or Not? The Effects of Social Influences and Network Topology on Innovation Diffusion

Innovation diffusion theory suggests that consumers differ concerning the number of contacts they have and the degree and the direction to which social influences determine their choice to adopt. To test the impacts of these factors on innovation diffusion, in particular the occurrence of hits and flops, a new agent‐based model for innovation diffusion is introduced. This model departs from existing percolation models by using more realistic agents (both individual preferences and social influence) and more realistic networks (scale free with cost constraints). Furthermore, it allows consumers to weight the links they have, and it allows links to be directional. In this way this agent‐based model tests the effect of VIPs who can have a relatively large impact on many consumers. Results indicate that markets with high social influence are more uncertain concerning the final success of the innovation and that it is more difficult for the innovation to take off. As consumers affect each other to adopt or not at the beginning of the diffusion, the new product has more difficulties to reach the critical mass that is necessary for the product to take off. In addition, results of the simulation experiments show under which conditions highly connected agents (VIPs) determine the final diffusion of the innovation. Although hubs are present in almost any network of consumers, their roles and their effects in different markets can be very different. Using a scale‐free network with a cut‐off parameter for the maximum number of connections a hub can have, the simulation results show that when hubs have limits to the maximum number of connections the innovation diffusion is severely hampered, and it becomes much more uncertain. However, it is found that the effect of VIPs on the diffusion curve is often overestimated. In fact when the influence of VIPs on the decision making of the consumers is strengthened compared with the influence of normal friends, the diffusion of the innovation is not substantially facilitated. It can be concluded that the importance of VIPs resides in their capacity to inform many consumers and not in a stronger persuasive power.     

The Adverstising Market in a Product Oligopoly

A model is developed in which producers in a differentiated product market compete in prices and informative advertising. The model also includes commercial media, which are linked to producers through the advertising market and to consumers through the media market. We investigate how certain market parameters, such as media market differentiation or product market differentiation, affect the competitive level advertising chosen in the market. The model shows that less product differentiation or more media differentiation leads to a higher market level of advertising. In the case of sufficiently high media differentiation, levels of advertising are in excess of the social optimum.     

Consumer Response to Product Form in Technology‐Based Industries

Product design is a key driver of competitive advantage and new product success. Relative to its importance, product design remains an underresearched area. The authors address this issue by examining the moderating effects of consumer innovativeness and design acumen on consumer response to product form—i.e., the product's visual appearance. Using subjects from the United Kingdom, these effects were tested with a technology‐based product that is expected to be introduced to market in the near future. A technological innovation was chosen because such products are often characterized by an accelerating pace of innovation and shortening life cycles. In such contexts, the product's visual appearance is often critical to success because it drives inferences about the technical capabilities and functional novelty. Our findings indicate that for more innovative consumers, an innovative product form can further enhance perceived value, product liking, and purchase intention. Furthermore, for consumers who possess more design acumen, an innovative product form can increase perceived value and product liking. An innovative product form was not found to enhance purchase intention for consumers with higher levels of design acumen. A primary implication of the study is to consider target market characteristics such as consumer innovativeness and design acumen when selecting a product form strategy. Additional implications include involving consumer innovators in the development and evaluation of product forms and involving consumers with greater design acumen early in the product's introduction so that they may influence other buyers.     

PERSPECTIVE: Older Adults' Adoption of Technology: An Integrated Approach to Identifying Determinants and Barriers

Technology has recently begun to be explored as a way to cope with the challenges related to the aging of the population. However, while many technological systems for older adults have entered the market, the rate of adoption is low despite the potential benefits they intend to provide. The market response suggests that older adults' adoption of technology is not simply a matter of performance and price, but a complex issue that is affected by multiple factors. To address the issue in a more comprehensive way, this review study identifies factors that influence older adults' perceptions and decisions around adoption and use of technology‐enabled products and services with an integration of related findings from various fields. Based on a survey of related studies, 10 factors—value, usability, affordability, accessibility, technical support, social support, emotion, independence, experience, and confidence—are identified as the facilitators or determinants of older adults' adoption of technology. While previous studies have focused on detailed design and physical ease‐of‐use, the 10 factors provide a holistic framework that covers social contexts of use and delivery and communication channels as well as individual characteristics and technical features. This paper describes the factors with empirical evidence and design implications. The goal of this paper is to provide a base for a more comprehensive understanding of older adults as users and consumers of technology; to inform designers, developers, and managers about practical implications; and to set a research agenda for future studies in related fields.