A Competitive Model of Customization with Lead‐Time Effects

In this article, we study the competitive interactions between a firm producing standard products and a firm producing custom products. Consumers with heterogeneous preferences choose between n standard products, which may not meet their preferences exactly but are available immediately, and a custom product, available only after a certain lead time l. Standard products incur a variety cost that increases with n and custom products incur a lead time cost that is decreasing in the lead time l. We consider a two‐stage game wherein at stage 1, the standard product firm chooses the variety and the custom firm chooses the lead time and then both firms set prices simultaneously. We characterize the subgame‐perfect Nash equilibrium of the game. We find that both firms can coexist in equilibrium, either sharing the market as local monopolists or in a price‐competitive mode. The standard product firm may offer significant or minimal variety depending on the equilibrium outcome. We provide several interesting insights on the variety, lead time, and prices of the products offered and on the impact of problem parameters on the equilibrium outcomes. For instance, we show that the profit margin and price of the custom product are likely to be higher than that of standard products in equilibrium under certain conditions. Also, custom firms are more likely to survive and succeed in product markets with larger potential market sizes. Another interesting insight is that increased consumer sensitivity to product fit may result in lower lead time for the custom product.     

Production and Sales Planning in Capacitated New Product Introductions

How should a firm with limited capacity introduce a new product? Should it introduce the product as soon as possible or delay introduction to build up inventory? How do the product and market characteristics affect the firm's decisions? To answer such questions, we analyze new product introductions under capacity restrictions using a two‐period model with diffusion‐type demand. Combining marketing and operations management decisions in a stylized model, we optimize the production and sales plans of the firm for a single product. We identify four different introduction policies and show that when the holding cost is low and the capacity is low to moderate, a (partial) build‐up policy is indeed optimal if consumers are sensitive to delay. Under such a policy, the firm (partially) delays the introduction of its product and incurs short‐term backlog costs to manage its future demand and total costs more effectively. However, as either the holding cost or the capacity increases, or consumer sensitivity to delay decreases, the build‐up policy starts to lose its appeal, and instead, the firm prefers an immediate product introduction. We extend our analysis by studying the optimal capacity decision of the firm and show that capacity shortages may be intentional.     

Optimal Policies for Selling New and Remanufactured Products

Because of environmental and economic reasons, an increasing number of original equipment manufacturers (OEMs) nowadays sell both new and remanufactured products. When both products are available, customers will buy the one that gives them a higher (and non‐negative) utility. Thus, if the firm does not price the products properly, then product cannibalization may arise and its revenue may be adversely impacted. In this paper, we study the pricing problem of a firm that sells both new and remanufactured products over a finite planning horizon. Customer demand processes for both new and remanufactured products are random and price‐sensitive, and product returns (also called cores) are random and remanufactured upon receipt. We characterize the optimal pricing and manufacturing policies that maximize the expected total discounted profit. If new products are made‐to‐order (MTO), we show that when the inventory level of remanufactured product increases, the optimal price of remanufactured product decreases while the price difference between new and remanufactured products increases; however, the optimal selling price of new product may increase or decrease. If new products are made to stock (MTS), then the optimal manufacturing policy is of a base‐stock policy with the base‐stock level decreasing in the remanufactured product inventory level. To understand the potential benefit in implementing an MTO system, we study the difference between the value functions of the MTO and MTS systems, and develop lower and upper bounds for it. Finally, we study several extensions of the base model and show that most of our results extend to those more general settings.     

Optimal Pricing of Two Successive‐Generation Products with Trade‐in Options under Uncertainty

To entice consumers to purchase both current and next generation products, many manufacturers and retailers offer trade‐in programs that allow buyers of the first generation product to trade‐in the product and purchase the new generation product at a lower price. By considering the interactions between “forward‐looking” consumers and a firm when a trade‐in program is offered, we analyze a two‐period dynamic game to determine the optimal prices of two successive‐generation products in equilibrium, and examine the conditions under which trade‐in programs are beneficial to the firm. Our model incorporates market heterogeneity (valuation of the first generation product varies among the consumer population), product uncertainty (the incremental value of the new product is uncertain before its introduction), and consumers' forward‐looking behavior (consumers take future product valuation and prices into consideration when making purchasing decisions). With the trade‐in option, we show that consumers are willing to pay a price that is higher than their valuations of the current product. Furthermore, trade‐in programs are more beneficial to the firm when: (i) the durability of the current product is high; (ii) the market heterogeneity is low; or (iii) the uncertainty level (or the expected incremental value) of the new product is high. Finally, when the incremental value of the new product is more uncertain, consumers are more willing to purchase the current product because of the “option” value of the trade‐in programs and thus trade‐in programs can be more beneficial to the firm in this case.     

Product Portfolio Strategies: The Case of Multifunction Products

Motivated by the proliferation of multifunction products, we investigate product portfolio decisions of a single firm by analyzing the impact of three major factors. First, because multifunction products provide complete or partial functionalities of single‐function products, we incorporate substitution or cannibalization effects between the potential products. Second, we explicitly model the variable costs of manufacturing the single‐function and multifunction products. Third, we examine the firm's pricing decisions because of their impact on the degree of cannibalization between the multifunction product and one or more single‐function products. Using an economic model, we first characterize the firm's optimal product portfolio (through a quantity‐based decision), which in turn determines the market equilibrium prices for each product in its portfolio. Some of the unique insights stemming from our analysis are: (a) the optimal product portfolio choice is driven primarily by maximum profit margins for the single‐function products weighted by the demand substitution effects; and (b) from a product design perspective, the complete functionality of the base single‐function product is always included in the optimal product offering, but this is not necessarily the case with the complete functionality of the nonbase single‐function product.     

Strategic Capacity Management When Customers Have Boundedly Rational Expectations

In retailing industries, such as apparel, sporting goods, customer electronics, and appliances, many firms deploy sophisticated modeling and optimization software to conduct dynamic pricing in response to uncertain and fluctuating market conditions. However, the possibility of markdown pricing creates an incentive for customers to strategize over the timing of their purchases. How should a retailing firm optimally account for customer behavior when making its pricing and stocking/capacity decisions? For example, is it optimal for a firm to create rationing risk by deliberately under stocking products? In this study, we develop a stylized modeling framework to answer these questions. In our model, customers strategize over the timing of their purchases. However, customers have boundedly rational expectations in the sense of anecdotal reasoning about the firm's fill rate, i.e., they have to rely on anecdotes, past experiences, or word‐of‐mouth to infer the firm's fill rate. In our modeling framework, we distinguish two settings: (i) capacity commitment, where the firm commits to its capacity level in the long run, or (ii) the firm dynamically changes it in each season. For both settings, within the simplest form of anecdotal reasoning, we prove that strategic capacity rationing is not optimal independent of customer risk preferences. Then, using a general form of anecdotal reasoning, we provide sufficient conditions for capacity rationing to be optimal for both settings, respectively. We show that the result of strategic capacity rationing being suboptimal is fairly robust to different valuation distributions and utility functions, heterogeneous sample size, and price optimization.     

Product Positioning Using a Self‐Organizing Map and the Rings of Influence

In this article, we propose a new product positioning method based on the neural network methodology of a self‐organizing map. The method incorporates the concept of rings of influence, where a firm evaluates individual consumers and decides on the intensity to pursue a consumer, based on the probability that this consumer will purchase a competing product. The method has several advantages over earlier work. First, no limitations are imposed on the number of competing products and second, the method can position multiple products in multiple market segments. Using simulations, we compare the new product positioning method with a quasi‐Newton method and find that the new method always approaches the best solution obtained by the quasi‐Newton method. The quasi‐Newton method, however, is dependent on the initial positions of the new products, with the majority of cases ending in a local optimum. Furthermore, the computational time required by the quasi‐Newton method increases exponentially, while the time required by the new method is small and remains almost unchanged, when the number of new products positioned increases. We also compute the expected utility that a firm will provide consumers by offering its products. We show that as the intensity with which a firm pursues consumers increases, the new method results in near‐optimal solutions in terms of market share, but with higher expected utility provided to consumers when compared to that obtained by a quasi‐Newton method. Thus, the new method can serve as a managerial decision‐making tool to compare the short‐term market share objective with the long‐term expected utility that a firm will provide to consumers, when it positions its products and intensifies its effort to attract consumers away from competition.     

Seeking Closure: Competition in Complementary Markets*

When offering a product that has a complementary product in a different market, a firm must consider the interdependence between the complementary products as well as the competition within markets. If the firm participates in both markets, the balancing act becomes even more challenging. This article provides insights about strategies in this latter setting: when should the firm seek to keep its products closed to competing complementary products, and when would the firm be better off by accepting a common standard? To address these questions, we employ standard game theoretic analysis to a simple spatial model that captures aspects of both intermarket externalities and intramarket competition. We find that if a firm participates in both markets and chooses a closed standard, it achieves lower profits compared to an open standard, but gains greater market share. Surprisingly, we find that customers are better off when standards are kept closed.     

Replacement Decisions for Potentially Hazardous Substances

As public awareness of environmental hazards increases, a growing concern for corporations is the potential negative environmental impact of their products and the chemicals these products contain. In this study, we analyze the optimal decisions of a firm when a substance within its product is identified as potentially hazardous. Although the substance is not currently regulated, regulation may occur in the future. Therefore, the firm must devise a strategy for the development and implementation of a replacement substance. In an environment where replacement costs can be millions of dollars, regulation is uncertain, and both consumer and non‐governmental organization pressures exist, a carefully developed plan that balances costs and risks is critical for a firm. Our results demonstrate that as long as a threat of regulation exists, a firm should always dedicate resources toward developing a replacement substance. However, it is not always optimal for a firm to implement a developed replacement. Regarding competitive dynamics, we find that competition between firms can offset a low chance of a shift in consumer perception about a substance and compel firms to replace; however, competition can lead to inefficient outcomes in which firms incur avoidable costs to implement ahead of potential regulation.     

Investment in Facility Changeover Flexibility for Early Entry into High‐Tech Markets

A model is introduced to analyze the manufacturing‐marketing interface for a firm in a high‐tech industry that produces a series of high‐volume products with short product life cycles on a single facility. The one‐time strategic decision regarding the firm's investment in changeover flexibility establishes the link between market opportunities and manufacturing capabilities. Specifically, the optimal changeover flexibility decision is determined in the context of the firm's market entry strategy for successive product generations, the changeover cost between generations, and the production efficiency of the facility. Moreover, the dynamic pricing policy for each product generation is obtained as a function of the firm's market entry strategy and manufacturing efficiency. Our findings provide insights linking internal manufacturing capabilities with external market forces for the high‐tech and high‐volume manufacturer of products with short life cycles. We show the impact of manufacturing efficiency and a firm's ability to benefit from volume‐based learning on the dynamic pricing policy for each product generation. The results demonstrate the benefits realized by a firm that works with its manufacturing equipment suppliers to develop more efficient and flexible technology. In addition, we explore how opportunities afforded by pioneer advantage enable a firm operating a less efficient facility to realize long term competitive advantage by deploying an earlier market entry strategy.     

Capacity Investment Under Responsive Pricing: Implications of Market Entry Choice*

We consider a manufacturer’s new market entry problem when it already has some established facility in its existing market. We consider two common market entry strategies: the export strategy and the foreign direct investment (FDI) strategy. In the export strategy the firm increases the capacity at its existing facility and subsequently allocates the output to the existing and the new market dynamically, depending on realized market conditions. The export strategy is a flexible strategy. In the FDI strategy, the firm invests in a dedicated capacity to serve the new market only. The FDI strategy is a (partially) dedicated strategy. We study these two strategies from a planning perspective, that is, how the firm’s strategy choice influences the optimal capacity levels. We find that the firm’s strategy choice can significantly impact the optimal capacity investment levels. We prove, for example, that the firm may enter the new market in the export strategy but not in the FDI strategy, even if the capacity investment cost is identical in the existing and the new market. In addition, we prove that the firm may invest a strictly higher capacity level in the export strategy than that in the FDI strategy. We also prove that new market entry in the FDI strategy may strictly decrease the firm’s supply to its existing market but this is not so in the export strategy, and hence policy makers should carefully consider the implications of trade regulations on firms’ market entry choices.     

Optimal Temporal Customer Purchasing Decisions Under Trade‐In Programs with Up‐Front Fees

To entice customers to purchase both current and new generation products over time, many firms offer different trade‐in programs including programs that require customers to pay an up‐front fee. To examine the effectiveness of the trade‐in programs, we develop a two‐period model in which a firm sells the first generation product in the first period and the second generation product in the second period; however, the firm offers a trade‐in program that customers can participate in when purchasing the first generation product in the first period. To participate, each customer has to pay a nonrefundable fee in the first period so that she has the option to trade‐in her first generation product and receive a prespecified trade‐in value to be used for the purchase of the second generation product in the second period. To capture market heterogeneity and market uncertainty, we examine the case when the valuation of the first generation product varies among customers and the valuation of the second generation product is uncertain a priori. By analyzing a two‐period game, we determine the optimal purchasing behavior of each rational customer, and we show that the firm is always better off by offering its own trade‐in programs. Also, our numerical analysis reveals that trade‐in programs can benefit the firm significantly especially when (i) the residual value of the first generation product is high; (ii) the expected incremental value of the second generation product is high; or (iii) the valuation of the second generation product is highly uncertain.     

The Firm as a Means of Concealing Information

The aim of this paper is to demonstrate that a firm may owe its continued existence to its attempts to conceal information from its competitors about the unknown characteristics of a certain factor, not just to its savings on market transaction costs, its team‐working, risk‐sharing, or the encouragement of ex ante specific investment. This is because the existence of a firm contract severs the relationship between the factor market and the product market, thereby making it difficult for outsiders to observe the marginal contribution of the intermediate factor and make statistical inferences about the factor's unknown characteristics. Furthermore, an optimal contract is determined by a trade‐off not only between traditional risk‐sharing and incentive, but also between the incentive and information concealing. Finally, we show that this latter kind of trade‐off also affects the position of the optimal boundary of the firm.     

Replenishment Policies for Multi‐Product Stochastic Inventory Systems with Correlated Demand and Joint‐Replenishment Costs

This study analyzes optimal replenishment policies that minimize expected discounted cost of multi‐product stochastic inventory systems. The distinguishing feature of the multi‐product inventory system that we analyze is the existence of correlated demand and joint‐replenishment costs across multiple products. Our objective is to understand the structure of the optimal policy and use this structure to construct a heuristic method that can solve problems set in real‐world sizes/dimensions. Using an MDP formulation we first compute the optimal policy. The optimal policy can only be computed for problems with a small number of product types due to the curse of dimensionality. Hence, using the insight gained from the optimal policy, we propose a class of policies that captures the impact of demand correlation on the structure of the optimal policy. We call this class (s, c, d, S)‐policies, and also develop an algorithm to compute good policies in this class, for large multi‐product problems. Finally using an exhaustive set of computational examples we show that policies in this class very closely approximate the optimal policy and can outperform policies analyzed in prior literature which assume independent demand. We have also included examples that illustrate performance under the average cost objective.     

Flexible Capacity Investments and Product Mix: Optimal Decisions and Value of Postponement Options

In this article, we study a firm's interdependent decisions in investing in flexible capacity, capacity allocation to individual products, and eventual production quantities and pricing in meeting uncertain demand. We propose a three‐stage sequential decision model to analyze the firm's decisions, with the firm being a value maximizer owned by risk‐averse investors. At the beginning of the time horizon, the firm sets the flexible capacity level using an aggregate demand forecast on the envelope of products its flexible resources can accommodate. The aggregate demand forecast evolves as a Geometric Brownian Motion process. The potential market share of each product is determined by the Multinomial Logit model. At a later time and before the end of the time horizon, the firm makes a capacity commitment decision on the allocation of the flexible capacity to each product. Finally, at the end of the time horizon, the firm observes the demand and makes the production quantity and pricing decisions for end products. We obtain the optimal solutions at each decision stage and investigate their optimal properties. Our numerical study investigates the value of the postponed capacity commitment option in supplying uncertain operation environments.     

Product Positioning in a Two‐Dimensional Market Space

This paper examines the optimal product portfolio positioning for a monopolist firm in a market where consumers exhibit vertical differentiation for product performance and horizontal differentiation for product feature. Our key results are as follows: (i) Variable costs drive vertical differentiation. In the presence of significant volume‐dependent manufacturing costs, the optimal portfolio contains a mix of vertically and horizontally differentiated products and an increase in the variable cost makes adding vertically differentiated products relatively more profitable; if fixed volume‐independent design costs dominate, the portfolio exhibits solely horizontal differentiation. (ii) Horizontal differentiation is the main profit lever, and vertical differentiation brings only a marginal benefit; this is true even when most of the consumers exhibit low willingness to pay for performance, which is often used as an excuse to offer low‐end products. (iii) There are more low‐quality products than high‐quality ones, and market coverage increases when the willingness to pay for performance increases. In summary, the model shows how portfolio composition decisions depend on the product cost structure and the consumer preferences.     

Multi‐Product Quality Competition: Impact of Resource Constraints

We study a multi‐product firm with limited capacity where the products are vertically (quality) differentiated and the customer base is heterogeneous in their valuation of quality. While the demand structure creates opportunities through proliferation, the firm should avoid cannibalization between its own products. Moreover, the oligopolistic market structure puts competitive pressure and limits the firm's market share. On the other hand, the firm has limited resources that cause a supply‐side fight for adequate and profitable production. We explicitly characterize the conditions where each force dominates. Our focus is on understanding how capacity constraints and competition affect a firm's product‐mix decisions. We find that considering capacity constraints could significantly change traditional insights (that ignore capacity) related to product‐line design and the role of competition therein. In particular, we show that when the resources are limited, the firm should offer only the product that has the highest margin per unit capacity. We find that this product could be the diametrically opposite product suggested by the existing literature. In addition, we show that for intermediate capacity levels, whereas the margin per unit capacity effect dominates in a less competitive market, proliferation and cannibalization effects dominate in a more competitive market.     

Combined Pricing and Portfolio Option Procurement

In this paper, we study a single‐product periodic‐review inventory system that faces random and price‐dependent demand. The firm can purchase the product either from option contracts or from the spot market. Different option contracts are offered by a set of suppliers with a two‐part fee structure: a unit reservation cost and a unit exercising cost. The spot market price is random and its realization may affect the subsequent option contract prices. The firm decides the reservation quantity from each supplier and the product selling price at the beginning of each period and the number of options to exercise (inventory replenishment) at the end of the period to maximize the total expected profit over its planning horizon. We show that the optimal inventory replenishment policy is order‐up‐to type with a sequence of decreasing thresholds. We also investigate the optimal option‐reservation policy and the optimal pricing strategy. The optimal reservation quantities and selling price are shown to be both decreasing in the starting inventory level when demand function is additive. Building upon the analytical results, we conduct a numerical study to unveil additional managerial insights. Among other things, we quantify the values of the option contracts and dynamic pricing to the firm and show that they are more significant when the market demand becomes more volatile.     

Fusion Product Planning: A Market Offering Perspective*

Devices that integrate multiple functions together are popular in consumer electronic markets. We describe these multifunction devices as fusion products as they fuse together products that traditionally stand alone in the marketplace. In this article, we investigate the manufacturer's fusion product planning decision, adopting a market offering perspective that allows us to address the design and product portfolio decisions simultaneously. The general approach adopted is to develop and analyze a profit‐maximizing model for a single firm that integrates product substitution effects in identifying an optimal market offering. In the general model, we demonstrate that the product design and portfolio decisions are analytically difficult to characterize because the number of possible portfolios can be extremely large. The managerial insight from a stylized all‐in‐one model and numerical analysis is that the manufacturer should, in most cases, select only a subset of fusion and single‐function products to satisfy the market's multidimension needs. This may explain why the function compositions available in certain product markets are limited. In particular, one of the key factors driving the product portfolio decision is the margin associated with the fusion products. If a single all‐in‐one fusion product has relatively high margins, then this product likely dominates the product portfolio. Also, the congruency of the constituent single‐function products is an important factor. When substitution effects are relatively high (i.e., the product set is more congruent), a portfolio containing a smaller number of products is more likely to be optimal.     

An analysis of export market strategies and barriers perceptions by U.S. agricultural HVP exporters

This study identifies barriers perceived by agricultural exporters and examines how these perceptions influence use of export market strategies. Ordered logit models are used to estimate effects of perceived barriers and firm characteristics on export market strategies. The results from these models show that perceptions about import restrictions influence use of diversification of exports across products, competition influences use of competitive export pricing, and overseas product regulations affect product adaptation for export markets.