Conflicts and cooperation: New product development or co-development in a supply chain

The collaborations between manufacturers and retailers through co-development enhance the efficiency of new product development (NPD). We consider the practical concern that the matching degree between new products and consumers remains uncertain at the beginning of NPD and becomes manufacturers’ private information after NPD is completed, which significantly influences the pricing and quality strategies of manufacturers, consequently impacts the co-development investment of retailers. In this paper, by constructing a game-theoretic model involving a manufacturer and a retailer, we examine two pricing modes for the manufacturer: preannounced pricing which is made at the beginning of NPD and responsive pricing which is made after completing NPD. Within these pricing frameworks, we study the manufacturer’s pricing and quality strategies, all while examining how retailer’s engagement in co-development impacts the information structure and the manufacturer’s decisions. Surprisingly, we find that co-development enables the manufacturer to always embrace the preannounced pricing strategy, even if it places the manufacturer at an information disadvantage. In addition, in the absence of co-development, the responsive pricing is not always beneficial for the manufacturer, but it always induces a higher product quality partially due to the strategy distortion in the signaling game under asymmetric information. Finally, co-development will hurt the manufacturer and the retailer when the uncertainty level of the matching degree information is relatively small, while it paves the way for a mutually beneficial “win-win” scenario for both parties when the uncertainty level is relatively large.