Product development capability and marketing strategy for new durable products

Our objective is to understand how a firm’s product development capability (PDC) affects the launch strategy for a durable product that is sequentially improved over time in a market where consumers have heterogeneous valuations for quality. We show that the launch strategy of firms is affected by the degree to which consumers think ahead. However, only the strategy of firms with high PDC is affected by the observability of quality. When consumers are myopic and quality is observable, both high and low PDC firms use price skimming and restrict sales of the first generation to consumers with high willingness to pay (WTP). A high PDC firm, however, sells the second generation broadly while a low PDC firm only sells the second generation to consumers with low WTP. When consumers are myopic and quality is unobservable, a firm with high PDC signals its quality by offering a low price for the first generation, which results in broad selling. The price of the second generation is set such that only high WTP consumers buy. A firm with low PDC will not mimic this strategy. If a low PDC firm sells the first generation broadly, it cannot discriminate between the high and low WTP consumers. When consumers are forward looking, a firm with high PDC sells the first generation broadly. This mitigates the “Coase problem” created by consumers thinking ahead. It then sells the second generation product only to the high WTP consumers. In contrast, a firm with low PDC does the opposite. It only sells the first generation to high WTP consumers and the second generation broadly.