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Optimal Entry Timing for a Product Line Extension

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Author Info

  • Lynn O. Wilson

    (AT&T Bell Laboratories)

  • John A. Norton

    (University of Virginia)

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    Abstract

    When should a firm introduce a line extension or improved product in order to maximize total profits from the original product and the line extension? We identify three critical issues which affect the answer to this question: the interrelationship of sales of the two products because of substitution and diffusion, the relative margins of the two products, and the relationship of the length of the firm's planning horizon to the original product's diffusion time. We develop a model in which the first product contributes a higher unit margin; however, sales develop slowly. The line extension contributes a lower unit margin and partially cannibalizes sales of the original product, but also broadens the market, causing sales to develop more rapidly. The timing of the introduction of the line extension affects the subsequent sales pattern for both products and the total profit to be made within the planning period. The optimal entry time depends upon the product pair's substitutability. We show that it is best either to introduce the line extension at a time early in the life cycle of the original product or not to introduce it at all. Consideration of dynamic phenomena can make a difference. For example, our results indicate that in some cases the line extension should be introduced early, whereas a simpler static analysis (which neglects diffusion and the implications of a finite planning horizon) would indicate that the line extension should never be introduced.

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    File URL: http://dx.doi.org/10.1287/mksc.8.1.1
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 8 (1989)
    Issue (Month): 1 ()
    Pages: 1-17

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    Handle: RePEc:inm:ormksc:v:8:y:1989:i:1:p:1-17

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    Related research

    Keywords: product line; product development; product introduction; timing; optimal;

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    Cited by:
    1. Franses, Ph.H.B.F. & Hernández-Mireles, C., 2006. "When Should Nintendo Launch its Wii? Insights From a Bivariate Successive Generation Model," ERIM Report Series Research in Management ERS-2006-032-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
    2. Hernández-Mireles, C. & Franses, Ph.H.B.F., 2010. "The Launch Timing of New and Dominant Multigeneration Technologies," ERIM Report Series Research in Management ERS-2010-022-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
    3. Chiou, Lesley, 2008. "The timing of movie releases: Evidence from the home video industry," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1059-1073, September.
    4. Chih-yi Chi, Woody & Wu, Shufen, 2006. "Intertemporal quality discrimination of a durable good monopolist," Economics Letters, Elsevier, vol. 92(2), pages 184-191, August.
    5. Bhattacharya, Shantanu & Krishnan, V. & Mahajan, Vijay, 2003. "Operationalizing technology improvements in product development decision-making," European Journal of Operational Research, Elsevier, vol. 149(1), pages 102-130, August.
    6. Souza, Gilvan C., 2004. "Product introduction decisions in a duopoly," European Journal of Operational Research, Elsevier, vol. 152(3), pages 745-757, February.
    7. Druehl, Cheryl T. & Schmidt, Glen M. & Souza, Gilvan C., 2009. "The optimal pace of product updates," European Journal of Operational Research, Elsevier, vol. 192(2), pages 621-633, January.
    8. Wilhelm, Wilbert E. & Xu, Kaihong, 2002. "Prescribing product upgrades, prices and production levels over time in a stochastic environment," European Journal of Operational Research, Elsevier, vol. 138(3), pages 601-621, May.
    9. 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.
    10. Hao Zhao, 2003. "R&D Competition Between an Incumbent and an Entrant: An Integrated Model of R&D Investment, Performance Improvement, and Time-to-Market," Review of Marketing Science Working Papers 2-2-1023, Berkeley Electronic Press.
    11. Laksana, Kamonkan & Hartman, Joseph C., 2010. "Planning product design refreshes with service contract and competition considerations," International Journal of Production Economics, Elsevier, vol. 126(2), pages 189-203, August.
    12. Chen, Yuwen & Carrillo, Janice E., 2011. "Single firm product diffusion model for single-function and fusion products," European Journal of Operational Research, Elsevier, vol. 214(2), pages 232-245, October.

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