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Why Are Bad Products So Hard to Kill?

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Author Info

  • Duncan Simester

    ()
    (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142)

  • Juanjuan Zhang

    ()
    (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142)

Abstract

It is puzzling that firms often continue to invest in product development projects when they should know that demand will be low. We argue that bad products are hard to kill because firms face an inherent conflict when designing managers' incentives. Rewarding success encourages managers to forge ahead even when demand is low. To avoid investing in low-demand products, the firm must also reward decisions to kill products. However, rewarding managers for killing products effectively undermines the rewards for success. The inability to resolve this tension forces the firm to choose between paying an even larger bonus for success and accepting continued investment in low-demand products. We explore the boundaries of this argument by analyzing how the timing of demand information affects product investment decisions.

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File URL: http://dx.doi.org/10.1287/mnsc.1100.1169
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 56 (2010)
Issue (Month): 7 (July)
Pages: 1161-1179

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Handle: RePEc:inm:ormnsc:v:56:y:2010:i:7:p:1161-1179

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Related research

Keywords: product development; managerial incentives; moral hazard; adverse selection; information acquisition;

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Cited by:
  1. Matthias Kräkel & Anja Schöttner, 2014. "Optimal Sales Force Compensation," Working Paper Series of the Department of Economics, University of Konstanz 2014-09, Department of Economics, University of Konstanz.

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