Process choice under asymmetric competition with exogenous and endogenous product success probabilities

Abstract

To develop novel products in a competitive market, firms are under pressure to reduce their time-to-market by adopting a “concurrent process” that involves an upfront investment to speed up the process by conducting the final stage of development and production simultaneously. While the concurrent approach provides a time advantage, it involves a financial risk because, unlike the “sequential process” under which the production process will begin only after the new product passes the requisite tests, the firm cannot recoup the upfront production-related investment should the product fail the qualification or market test. Given this trade-off and the uncertain success of the product, should a firm adopt the concurrent process in a competitive market with asymmetric market shares and impatient consumers? Also, how would a firm’s development strategy change if the probability of product success can be controlled through research investments?

We provide a 2-stage (or 3-stage) duopoly game for the case when the product success probabilities are exogenously given (or endogenously determined). For both settings, in equilibrium, the concurrent process may be adopted by either one, both, or neither of the firms. Also, even when firms are symmetric, asymmetrical equilibria can emerge that have exactly one firm adopting the concurrent process. When the market-laggard firm has a higher exogenous success probability, a “catch-up” strategy can emerge that has the laggard firm adopt the concurrent process and the market-leading firm adopt the sequential process. This catch-up strategy cannot be sustained as a unique equilibrium when the success probabilities are endogenously determined.