Durable goods, new product introductions, network effects, supply chain design
When purchasing durable goods, consumers not only pay for current but also future consumption; consequently, forward looking behavior is an important consideration in durable goods markets. For example, anticipating that prices will go down in the future, consumers may delay the purchase today; such behavior has a significant impact on the firm’s marketing strategies. This dissertation investigates the impact of durability on two marketing strategies: new product introductions and supply chain design. The first part of this dissertation (Chapter 3) examines a durable goods manufacturer’s new product introduction strategy under different market environments where network effects and product compatibility are important. More specifically, this part explores the incentives of a firm to use either a replacement strategy or a skipping strategy—in the former, the firm commercializes the existing technology, while in the latter, it does not; in either case, an improved technology will be available in the future and the firm will introduce a new product at that time. Using a two-period analytical model with network effects, the analysis shows how the level of improvement in the new product, along with the type of compatibility between the products, interacts with network strength to determine the manufacturer’s optimal strategy. Under gradual new product improvement, there is a strict preference for replacement. In contrast, under rapid new product improvement, that preference only holds in markets with relatively high levels of the network strength; at lower levels of the network strength, skipping is preferred; interestingly, for moderate values of the network strength, the level of product improvement affects the manufacturer’s optimal choice differently under varying types of compatibility. The second part of this dissertation (Chapters 4 and 5) focuses on the supply chain design decisions of a durable goods manufacturer who is a sole supplier of an essential proprietary component for making the end product. Three different supply chain structures iii are considered. In the first, the manufacturer operates as a “component supplier” and sells the component to a downstream firm who then makes the end product. In the second structure, the manufacturer produces the end product using its component but does not make that component available to any other firms; here, the manufacturer operates as a “sole entrant”. Finally, the manufacturer can operate as a “dual distributor” who not only makes the end product using its own component, but sells the component to a downstream firm who then competes against the manufacturer in the end product market. The extant literature on the optimal choice among the above supply chain structures has focused mainly on static settings in a framework of price competition. By contrast, researchers predominantly use quantity competition to examine durable goods markets in dynamic (i.e., multiple time period) settings. Moreover, the literature notes diversity in optimal firm behavior under the two types of (i.e., price and quantity) competition. Therefore, to transition from supply chain design in a static setting to a more dynamic one where consumers are forward-looking, this part utilizes Chapter 4 to analyze the manufacturer’s choice using quantity competition in a static setting. This analysis (in Chapter 4) identifies precisely the shift in the manufacturer’s choice of supply chain structure when moving from price competition to a quantity competition framework. With that analysis as a benchmark, the next chapter focuses on the manufacturer’s choice in a dynamic setting. More specifically, Chapter 5 investigates the impact of durability on the optimality of the supply chain structures identified above. Using a two period setting, the analysis explores how the manufacturer’s preference for different supply chain structures is modified. The findings reveal that, e.g., when durability is taken into account, the manufacturer’s preference for the sole entrant role goes up, while the preference for the component supplier role goes down. Further, under certain conditions, the manufacturer may opt to be a dual distributor in the first period and then choose to become only a component supplier in the second period. The underlying rationale for such shifts in preference iv is directly linked to durability, which creates future competition and substantially reduces the manufacturer’s profitability in the long run. Interestingly, this negative impact varies across different supply chain structures. Overall, this dissertation contributes to the current literature on durable goods and enhances our understanding of the impact of durability on the optimality of distinct marketing strategies, and provides insights that are valuable to both academics and managers.
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Doctor of Philosophy (Ph.D.)
College of Business Administration
Business Administration; Marketing
Length of Campus-only Access
Doctoral Dissertation (Open Access)
Business Administration -- Dissertations, Academic, Dissertations, Academic -- Business Administration
Chau, Ngan Ngoc, "Three Essays On The Marketing Strategies Of A Durable Goods Manufacturer" (2012). Electronic Theses and Dissertations. 2363.