Open Source Development with a Commercial Complementary Product or Service

We examine optimal control decisions regarding pricing, network size, and hiring strategy in the context of open source software development. Opening the source code to a software product often implies that consumers would not pay for the software product itself. However, revenues may be generated from complementary products. A software firm may be willing to open the source code to its software if it stands to build a network for its complementary products. The rapid network growth is doubly crucial in open source development, in which the users of the firm's products are also contributors of code that translates to future quality improvements. To determine whether or not to open the source, a software firm must jointly optimize prices for its various products while simultaneously managing its product quality, network size, and employment strategy. Whether or not potential gains in product quality, network size, and labor savings are sufficient to justify opening the source code depends on product and demand characteristics of both the software and the complementary product, as well as on the cost and productivity of in‐house developers relative to open source contributors. This paper investigates these crucial elements to allow firms to reach the optimal decision in choosing between the open and closed source models.     

竞争环境下客户服务投入对企业利润影响的均衡分析

客户服务投入是企业吸引新顾客和维持现有顾客的重要手段之一。然而,服务投入究竟是否能给企业带来价值？对于这一问题,业界和学界都没有明确的答案。本文通过建模的方法研究在竞争的市场环境下,固有的市场因素对客户服务投入价值的影响。研究发现,服务竞争的市场均衡结构是两家厂商都投入客户服务。服务投入给企业带来的价值随着产品差异度的提高而提高,随着厂商自身市场份额的增加而增加。即,在产品差异度高的市场,服务投入更容易给企业带来价值。而在集中度高的市场,服务投入更容易给市场份额大的企业带来价值。     

On pricing and protection of complementary products

The business literature advises firms producing complementary products to sell the core product at a low price, but to price the complementary product at a higher premium. This strategy, however, is problematic if firms face competitors in the market for complementary products as well, as observed in recent years for instance in the market for printers/ink cartridges. Motivated by several measures the firms have taken in this market, the current paper analyzes whether firms are interested in protecting their complementary product from outside competition. We find that firms protect their products only if consumers underestimate the demand for the complementary product when deciding which core product to buy. Moreover, we investigate how the decision to protect the complementary product interacts with a firm’s pricing decision. We show that the price policy proposed in the business literature should only be applied, if consumers sufficiently underestimate their demand for the complementary product so that firms strongly protect these products from outside competition.     

Divide and Conquer: Competing with Free Technology Under Network Effects

We study how a commercial firm competes with a free open source product. The market consists of two customer segments with different preferences and is characterized by positive network effects. The commercial firm makes product and pricing decisions to maximize its profit. The open source developers make product decisions to maximize the weighted sum of the segments' consumer surplus, in addition to their intrinsic motivation. The more importance open source developers attach to consumer surplus, the more effort they put into developing software features. Even if consumers do not end up adopting the open source product, it can act as a credible threat to the commercial firm, forcing the firm to lower its prices. If the open source developers' intrinsic motivation is high enough, they will develop software regardless of eventual market dynamics. If the open source product is available first, all participants are better off when the commercial and open source products are compatible. However, if the commercial firm can enter the market first, it can increase its profits and gain market share by being incompatible with its open source competitor, even if customers can later switch at zero cost. This first‐mover advantage does not arise because users are “locked in,” but because the commercial firm deploys a “divide and conquer” strategy to attract early adopters and exploit late adopters. To capitalize on its first‐mover advantage, the commercial firm must increase its development investment to improve its product features.     

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.     

Product Positioning and Pricing Under Production Cost Considerations*

A framework in a competitive environment is proposed that incorporates production cost and economies of scale in the problem of positioning a product for a market segment. The model facilitates the existence of a Nash equilibrium in prices and product positions. As such, firms can simultaneously choose prices and product positions for the segment. This result improves the traditional theory on equilibria points in prices and product positions where firms choose their product positions first and then set their prices. A sensitivity analysis demonstrates the effects of changes in the unit savings derived from economies of scale or the cost of furnishing a product with its attributes by one firm on the product positions, prices, and profits of all competing firms. More important, the paper examines the effect on prices and profits of competing firms when one of the firms repositions its product closer to the segment's ideal point. It is shown that under certain conditions, the profit of a firm may actually decrease as it redesigns its product closer to the segment's ideal point. These conditions assist management to identify the product design beyond which enhancements of the product would lead to lower profits because of increasing production costs. It is also shown that the price of this firm increases. Past research supports the idea that positioning a brand closer to the ideal point, given fixed product positions of competing firms, would lead to greater buyer preferences and eventually higher profits. The price and profits of the competing firm may increase or decrease. Conditions are derived under which a movement towards the segment's ideal point by one firm would lead to higher profits by the competing firm.     

Managing Technology Selection and Development Risk in Competitive Environments

Managing development decisions for new products based on dynamically evolving technologies is a complex task, especially in highly competitive industries. Product managers often have to choose between introducing an incrementally better, safe new product early and a superior, yet highly risky, product later. Recommendations for managing such performance vs. time‐to‐market trade‐offs often ignore competitive reactions to development decisions. In this paper, we study how a firm could incorporate the presence of a strategic competitor in making technology selection and investment decisions regarding new products. We consider a model in which an innovating firm and its rival can introduce a new product immediately or pursue a more advanced product for later launch. Further, the firm can reduce the uncertainty surrounding product development by dedicating more resources; the effectiveness of this investment depends on the firm's innovative capacity. Our model generates two sets of insights. First, in highly competitive industries, firms can adopt different technologies and effectively use introduction timing to mitigate the effects of price competition. More importantly, the firm could strategically invest in the advanced product to influence its rival's technology choice. We characterize equilibrium development and investment decisions of the firms, and derive innovative capacity hurdles that govern a firm's choice between the risky and safe alternatives. The effects of development flexibility—where firms might have the option to revert to the safe product if the advanced product fails—are also considered.     

Committed Versus Contingent Pricing Under Competition

Should capacitated firms set prices responsively to uncertain market conditions in a competitive environment? We study a duopoly selling differentiated substitutable products with fixed capacities under demand uncertainty, where firms can either commit to a fixed price ex ante, or elect to price contingently ex post, e.g., to charge high prices in booming markets, and low prices in slack markets. Interestingly, we analytically show that even for completely symmetric model primitives, asymmetric equilibria of strategic pricing decisions may arise, in which one firm commits statically and the other firm prices contingently; in this case, there also exists a unique mixed strategy equilibrium. Such equilibrium behavior tends to emerge, when capacity is ampler, and products are less differentiated or demand uncertainty is lower. With asymmetric fixed capacities, if demand uncertainty is low, a unique asymmetric equilibrium emerges, in which the firm with more capacity chooses committed pricing and the firm with less capacity chooses contingent pricing. We identify two countervailing profit effects of contingent pricing under competition: gains from responsively charging high price under high demand, and losses from intensified price competition under low demand. It is the latter detrimental effect that may prevent both firms from choosing a contingent pricing strategy in equilibrium. We show that the insights remain valid when capacity decisions are endogenized. We caution that responsive price changes under aggressive competition of less differentiated products can result in profit‐killing discounting.     

PRODUCT OFFERING,PRICING, AND MAKE‐TO‐STOCK/MAKE‐TO‐ORDER DECISIONS WITH SHARED CAPACITY

In an era of mass customization, many firms continue to expand their product lines to remain competitive. These broader product lines may help to increase market share and may allow higher prices to be charged, but they also cause challenges associated with diseconomies of scope. To investigate this tradeoff, we considered a monopolist who faces demand curves, which for each of its potential products, decline with both price and response time (time to deliver the product). The firm must decide which products to offer, how to price them, whether each should be make‐to‐stock (mts) or make‐to‐order (mto), and how often to produce them. The offered products share a single manufacturing facility. Setup times introduce disceonomies of scope and setup costs introduce economies of scale. We provide motivating problem scenarios, model the monopolist's problem as a non‐linear, integer programming problem, characterize of the optimal policy, develop near‐optimal procedures, and discuss managerial insights.     

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.     

A game-theoretic model for co-promotions: Choosing a complementary versus an independent product ally

This paper studies the optimal choice of promotional partners in a three-firm market where two firms sell complementary products and a third firm sells an independent product. Game-theoretic models are developed to investigate the following scenarios: no promotional partnership, partnership between the two complementary products, partnership between a complementary product and the independent product, and partnership between the three products. Equilibrium Nash solutions are obtained and conditions under which each of the four scenarios above can be implemented are identified. Results show that these conditions depend on various parameters, mainly the degree of product complementarity, the effectiveness of individual promotion, the effectiveness of joint promotion, and the base demand for each product. Commonly, a partnership between a complementary product and the independent product is optimal when the price effect of the complementary product is large, while the partnership between the two complementary products is more appealing when the effect of individual promotion is large enough. When feasible, a promotional partnership between the three products is preferred, except in some specified conditions.     

Supplier competition and its impact on firm׳s sourcing strategy

Most research on firms׳ sourcing strategies assumes that wholesale prices and reliability of suppliers are exogenous. It is of our interest to study suppliers׳ competition on both wholesale price and reliability and firms׳ corresponding optimal sourcing strategy under complete information. In particular, we study a problem in which a firm procures a single product from two suppliers, taking into account suppliers׳ price and reliability differences. This motivates the suppliers to compete on these two factors. We investigate the equilibria of this supplier game and the firm׳s corresponding sourcing decisions. Our study shows that suppliers׳ reliability often plays a more important role than wholesale price in supplier competition and that maintaining high reliability and a high wholesale price is the ideal strategy for suppliers if multiple options exist. The conventional wisdom implies that low supply reliability and high demand uncertainty motivate dual-sourcing. We notice that when the suppliers׳ shared market/transportation network is often disrupted and demand uncertainty is high, suppliers׳ competition on both price and reliability may render the sole-sourcing strategy to be optimal in some cases that depend on the format of suppliers׳ cost functions. Moreover, numerical study shows that when the cost or vulnerability (to market disruptions) of one supplier increases, its profit and that of the firm may not necessarily decrease under supplier competition.     

Strategic Product/Service Innovations of an Online Firm

We study the incentives that drive an online firm to make various types of innovations in a competitive environment. We develop and use a simplified price competition model between two retailers, one online and one offline. A given fraction of consumers, called the Internet penetration, comparison shop online, independent of their customer type, thereby creating two markets for the offline retailer, a captive market and a competitive market. The online product has the steeper of the two linear utility functions, which means that the customers who buy online in our model are high end. We focus on the competitive region in which both retailers are (strictly) profitable in the competitive market and consider innovations that increase high‐end appeal, low‐end appeal, and/or reduce unit cost. We find that the online firm has a strong incentive to invest in innovations that either reduce unit cost and/or, equivalently, increase the appeal to all consumers equally. Investments of this type are strategic complements: implementing one increases the value of another, so the value of two innovations of this type is more than the sum of the values of each individually. We identify a relative strength measure of the online firm such that, as its high‐end appeal increases and/or its unit cost decreases, we say that the online firm is stronger. This strength measure facilitates drawing an explicit dividing line between strong and weak online firms. If Internet penetration increases, the online firm's profits increase if and only if it is strong. If penetration increases over time, it is possible for a strong firm to turn weak and see its profits decrease and possibly disappear completely. A strong online firm has more opportunity to profit from low‐end innovations than does a weak one, while the opposite is true for high‐end innovations. Interestingly, some innovations may actually decrease the online firm's profits. We discuss the implications of our results for existing and future online innovations.     

The globalization of smaller agri-food firms: a decision-making framework tested through case research

Anecdotal evidence suggests that smaller firms are responding in various ways to market trends towards globalization. A fundamental question arises as to why some smaller firms are including global markets in their strategies and business operations while other firms with similar size and product mix are not. This paper hypothesizes necessary and sufficient conditions for a smaller agri-food firm to become actively global in perspective and practice. An hypothesized decision framework is articulated and results are reported from eight cases used to test this framework. The paper concludes that perceptions about competitive advantages and effective demand, and operative decision rules employed by the firm will determine if and when a firm can globalize its scope of operations.     

Strategic Sourcing in the Presence of Uncertain Supply and Retail Competition

This study develops an analytical model to evaluate competing retail firms' sourcing strategies in the presence of supply uncertainty. We consider a common supplier that sells its uncertain supply to two downstream retail firms engaging in price competition in a horizontally differentiated product market. The focal firm has a dual‐sourcing option, while the rival firm can only source from the common supplier. We assess the system‐wide effects of supply uncertainty on the focal firm's incentive to pursue the dual‐sourcing strategy. We find that the focal firm's dual‐sourcing strategy can create a win–win situation that leads to increased retail prices and expected profits for both firms. Furthermore, under certain conditions, we show that it is beneficial for the focal firm to strategically source from the common supplier, even if its alternative supplier offers a lower wholesale price. Overall, we identify two types of incentives for adopting the dual‐sourcing strategy: the incentive of mitigating supply risk through supplier diversification and the incentive of strategic sourcing for more effective retail competition.     

The Effect of Competition on the Efficient–Responsive Choice

In determining their operations strategy, a firm chooses whether to be responsive or efficient. For firms competing in a market with uncertain demand and varying intensity of substitutability for the competitor's product, we characterize the responsive or efficient choice in equilibrium. To focus first on the competitive implications, we study a model where a firm can choose to be responsive at no additional fixed or marginal cost. We find that competing firms will choose the same configuration (responsive or efficient), and responsiveness tends to be favorable when demand uncertainty is high or when product competition is not too strong. Intense competition can drive firms to choose to be efficient rather than responsive even when there is no additional cost of being responsive. In such a case, both firms would be better off by choosing to be responsive but cannot credibly commit. We extend the basic model to study the impact of endogenized production timing, multiple productions and product holdback (or, equivalently, postponed production). For all these settings, we find structurally similar results; firms choose the same configuration, and the firms may miss Pareto‐improvements. Furthermore, through extensions to the basic model, we find that greater operational flexibility can make responsiveness look less attractive in the presence of product competition. In contrast to our basic model and other extensions, we find it is possible for one firm to be responsive while the other is efficient when there is either a fixed cost or variable cost premium associated with responsive delivery.     

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.     

Entry Deterrence of Capacitated Competition Using Price and Non‐Price Strategies

We analyze the role of pricing and branding in an incumbent firm's decision when facing competition from an entrant firm with limited capacity. We do so by studying two price competition models (Stackelberg and Nash), where we consider the incumbent's entry‐deterrence pricing strategy based on a potential entrant's capacity size. In an extension, we also study a branding model, where the incumbent firm, in addition to pricing, can also invest in influencing market preference for its product. With these models, we study conditions under which the incumbent firm may block the entrant (i.e., prevent entry without any market actions), deter the entrant (i.e., stop entry with suitable market actions) or accommodate the entrant (i.e., allow entry and compete), and how the entrant will allocate its limited capacity across its own and the new market, if entry occurs. We also study the timing difference between the two different dynamics of the price competition models and find that the incumbent's first‐mover advantage benefits both the incumbent and the entrant. Interestingly, the entrant firm's profits are not monotonically increasing in its capacity even when it is costless to build capacity. In the branding model, we show that in some cases, the incumbent may even increase its price and successfully deter entry by investing in consumer's preference for its product. Finally, we incorporate demand uncertainty into our model and show that the incumbent benefits from demand uncertainty while the entrant may be worse off depending on the magnitude of demand uncertainty and its capacity.     

Product Design Awards and The Market Value of The Firm

Product design has increasingly been recognized as an important source of competitive advantage. This study empirically estimates the impact of effective design on the market value of the firm. We use a firm's receipt of a product design award as a proxy for its design effectiveness. Based on data from 264 announcements of design awards given to commercialized products between 1998 and 2011, we find that award announcements are associated with statistically significant positive stock market reactions. Depending on the benchmark model used to estimate the stock market reaction, the market reaction over a two‐day period (the day of announcement and the preceding day) ranges from 0.95% to 1.02%. The market reaction is more positive for smaller firms and for firms whose award winning products are consumer goods. However, a firm's growth potential, industry competitiveness, and whether a firm is a first time or repeated award winner do not significantly affect the market reaction.     

INVENTORY RATIONING AND SHIPMENT FLEXIBILITY ALTERNATIVES FOR DIRECT MARKET FIRMS

This paper investigates inventory‐rationing policies of interest to firms operating in a direct market channel. We model a single product with two demand classes, where one class requests a lower order fulfillment lead time but pays a higher price. Demand for each class follows a Poisson process. Inventory is fed by a production system with exponentially distributed build times. We study rationing policies in which the firm either blocks or backlogs orders for the lower priority customers when inventory drops below a certain level. We compare the performance of these rationing policies with a pure first‐come, first‐serve policy under various scenarios for customer response to delay: lost sales, backlog, and a combination of lost sales and backlog.