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Product upgrading or not: R&D tax credit, consumer switch and information updating

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  • Shi, Xiutian
  • Shen, Bin

Abstract

Research and Development (R&D) investment is critically important for an innovation firm to maintain market value. In this paper, we examine whether the firm should adopt the product upgrading strategy. We build up a newsvendor model with Bayesian information updating. The firm produces and sells a normal product in the first period, and decides whether to make R&D investment to upgrade the product and switch to the line of upgraded one. The consumer may or may not switch from the normal product to the upgraded one in the second period based on the comparison of surplus. We find that it is beneficial to adopt the product upgrading strategy when the degree of upgraded product demand uncertainty is below a certain threshold. We identify the conditions, under which both the firm and consumer welfare would be better off, once the firm decides to sell the upgraded product. More managerial insights are discussed.

Suggested Citation

  • Shi, Xiutian & Shen, Bin, 2019. "Product upgrading or not: R&D tax credit, consumer switch and information updating," International Journal of Production Economics, Elsevier, vol. 213(C), pages 13-22.
    • Handle: RePEc:eee:proeco:v:213:y:2019:i:c:p:13-22
    DOI: 10.1016/j.ijpe.2019.02.015
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    References listed on IDEAS

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    Cited by:

    1. Dong, Rong & Wang, Nengmin & Jiang, Bin & He, Qidong, 2023. "Within-brand or cross-brand: The trade-in option under consumer switching costs," International Journal of Production Economics, Elsevier, vol. 255(C).
    2. Zhou, Haijie & Chen, Kebing & Wang, Shengbin, 2023. "Two-period pricing and inventory decisions of perishable products with partial lost sales," European Journal of Operational Research, Elsevier, vol. 310(2), pages 611-626.

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