Targeting and salesforce compensation: When sales spill over to unprofitable customers

Quantitative Marketing and Economics - Targeting selling efforts towards profitable customers is widely known to increase sales and allow firms to charge higher prices. In this paper, we show that...     

How incumbent firms foster consumer expectations, delay launch but still win the markets for next generation products

Consumers learn quality of many durable products through word-of-mouth information while firms launch new and improved products frequently in these markets. This paper examines firm incentives to invest in R&D to compete for patents in makets where consumers rely on word-of-mouth information and have expectations about the new products before launch. When its loss due to a possible entry is above a threshold, an incumbent has more incentives than a potential entrant to invest in R&D for patents. Moreover, if the current product is more profitable, its true quality is above consumer priors and the quality of the new product is below a threshold, it is optimal for the incumbent to launch the new product after a time lag. The later the optimal time of launch, the greater is the incumbent’s potential loss if entry occurs and greater its incentives is to invest in R&D versus that of the entrants. While potential entrants are generally thought to have more incentives to invest in a drastic innovation which results in a race to launch the new products, we show that the more drastic the innovation, the later the optimal time of launch and greater are the incumbent’s incentives to invest in R&D when the value added of the new product can be conveyed to all the consumers. Only when consumers are uncertain about the value added of the new product, the incumbent’s incentives are lower. We also demonstrate that by promoting consumer expectations about the new product before launch, an incumbent has more time to launch and higher probability of dominating its market.     

Recollections of My Career

Editorial Note:Professor Sumitro Djojohadilcusomo is one of the principal architects of Indonesia's post-independence economic policy. He has held key economic portfolios in both the immediate post-independence era and in the New Order. In addition, as Professor of Economics at the University of Indonesia, and as a tireless lecturer and writer on economic issues, he has been instrumental in shaping the education of several generations of economics students in Indonesia, many of whom are now in key government positions. At the end of August, Professor Sumitro generously agreed to be interviewed on his long career by two members of the BIES editorial board, Anne Booth and Thee Kian Wie. In preparing this interview for publication, the editors have tried to preserve Professor Sumilro's own words to the greatest extent possible; his lucid and entertaining remarks are thus reproduced with a minimum of editing. The interview began with a question to Professor Sumitro about his early training in economies.