Advanced Search
MyIDEAS: Login to save this article or follow this journal

An Empirical Model of Optimal Dynamic Product Launch and Exit Under Demand Uncertainty

Contents:

Author Info

  • Günter J. Hitsch

    ()
    (Graduate School of Business, University of Chicago, 5807 South Woodlawn Avenue, Chicago, Illinois 60637)

Registered author(s):

    Abstract

    This paper considers the decision problem of a firm that is uncertain about the demand, and hence profitability, of a new product. We develop a model of a decision maker who sequentially learns about the true product profitability from observed product sales. Based on the current information, the decision maker decides whether to scrap the product. Central to this decision problem are sequential information gathering, and the option value of scrapping the product at any point in time. The model predicts the optimal demand for information (e.g., in the form of test marketing), and it predicts how the launch or exit policy depends on the firm's demand uncertainty. Furthermore, it predicts what fraction of newly developed products should be launched on average, and what fraction of these products will “fail,” i.e., exit. The model is solved using numerical dynamic programming techniques. We present an application of the model to the case of the U.S. ready-to-eat breakfast cereal industry. Simulations show that the value of reducing uncertainty can be large, and that under higher uncertainty firms should strongly increase the fraction of all new product opportunities launched, even if their point estimate of profits is negative. Alternative, simpler decision rules are shown to lead to large profit losses compared to our method. Finally, we find that the high observed exit rate in the U.S. ready-to-eat cereal industry is optimal and to be expected based on our model.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://dx.doi.org/10.1287/mksc.1050.0140
    Download Restriction: no

    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 25 (2006)
    Issue (Month): 1 (01-02)
    Pages: 25-50

    as in new window
    Handle: RePEc:inm:ormksc:v:25:y:2006:i:1:p:25-50

    Contact details of provider:
    Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA
    Phone: +1-443-757-3500
    Fax: 443-757-3515
    Email:
    Web page: http://www.informs.org/
    More information through EDIRC

    Related research

    Keywords: new product strategy; product launch; product exit; managerial decision making under uncertainty; Bayesian learning; numerical dynamic programming; dynamic structural models;

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Christian, Michel, 2013. "Identification and Estimation of Intra-Firm and Industry Competition via Ownership Change," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 409, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    2. Nair, Harikesh, S., 2006. "Intertemporal Price Discrimination with Forward-Looking Consumers: Application to the US Market for Console Video-Games," Research Papers 1947, Stanford University, Graduate School of Business.
    3. Catherine Tucker & Juanjuan Zhang, 2008. "Decomposing the Congestion Effect and the Cross-Platform Effect in Two-Sided Networks: A Field Experiment," Working Papers 08-12, NET Institute, revised Oct 2008.
    4. Kirchner, Alexander & Labusch, Nils & Lopez Cordoba, Adriana & Sartor, Sebastian & Tumbas, Sanja, Villalon, Enrique & Wiethoff, Sebastian, 2011. "Network e-Volution," ERCIS Working Papers 11, Westfälsche Wilhelms-Universität Münster (WWU) - European Research Center for Information Systems (ERCIS).
    5. Andrew Ching & Susumu Imai & Masakazu Ishihara & Neelam Jain, 2012. "A practitioner’s guide to Bayesian estimation of discrete choice dynamic programming models," Quantitative Marketing and Economics, Springer, vol. 10(2), pages 151-196, June.
    6. Cristina Mitaritonna & Zhanar Akhmetova, 2013. "A Model of Firm Experimentation under Demand Uncertainty: an Application to Multi-Destination Exporters," Working Papers 2013-10, CEPII research center.
    7. Andrianos Tsekrekos, 2013. "Irreversible exit decisions under mean-reverting uncertainty," Journal of Economics, Springer, vol. 110(1), pages 5-23, September.
    8. Xiao, Junji, 2008. "Markov Perfect Equilibrium in the US digital camera market," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1233-1249, September.
    9. Michel, Christian, 2013. "Identification and Estimation of Intra-Firm and Industry Competition via Ownership Change," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80488, Verein für Socialpolitik / German Economic Association.
    10. Andrew T. Ching & Tülin Erdem & Michael P. Keane, 2013. "Learning Models: An Assessment of Progress, Challenges and New Developments," Economics Papers 2013-W07, Economics Group, Nuffield College, University of Oxford.
    11. Sorensen, Morten, 2007. "Learning by Investing: Evidence from Venture Capital," SIFR Research Report Series 53, Institute for Financial Research.
    12. Luís Cabral, 2012. "Lock in and switch: Asymmetric information and new product diffusion," Quantitative Marketing and Economics, Springer, vol. 10(3), pages 375-392, September.
    13. Hackl, Franz & Kummer, Michael E. & Winter-Ebmer, Rudolf & Zulehner, Christine, 2014. "Market structure and market performance in E-commerce," European Economic Review, Elsevier, vol. 68(C), pages 199-218.
    14. Xosé-Luís Varela-Irimia, 2012. "Profitability, uncertainty and multi-product firm product proliferation: The Spanish car industry," Working Papers XREAP2012-16, Xarxa de Referència en Economia Aplicada (XREAP), revised Sep 2012.
    15. Elliot Anenberg, 2012. "Information frictions and housing market dynamics," Finance and Economics Discussion Series 2012-48, Board of Governors of the Federal Reserve System (U.S.).
    16. Ching, Andrew & Ishihara, Masakazu, 2007. "The Effects of Detailing on Prescribing Decisions under Two-Sided Learning," MPRA Paper 4935, University Library of Munich, Germany.
    17. Andrew Sweeting, 2007. "Dynamic Product Repositioning in Differentiated Product Markets: The Case of Format Switching in the Commercial Radio Industry," NBER Working Papers 13522, National Bureau of Economic Research, Inc.
    18. Alessandro Bonatti, 2011. "Menu Pricing and Learning," American Economic Journal: Microeconomics, American Economic Association, vol. 3(3), pages 124-63, August.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:25:y:2006:i:1:p:25-50. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.