Lower Cost or Higher Quality? Product Enhancement Decisions When Consumers Are Strategic
نویسندگان
چکیده
Firms developing new products must often make a trade-o¤ between production costs and product quality: higher quality products are more valued by consumers, but also more costly to manufacture. We analyze the impact of activities that increase consumer value (quality improvement e¤orts) and activities that decrease production costs (cost reduction e¤orts) on the pro t of a rm. We demonstrate that when demand is deterministic, an increase in consumer value and a decrease in production cost of the same amount have an identical e¤ect on rm pro t. When demand is stochastic, however, the two strategies di¤er. In particular, if consumers are non-strategic, cost reduction is always more valuable to the rm than quality improvement (of the same amount). On the other hand, if consumers are strategic (i.e., anticipate future price reductions and time their purchasing decisions), quality improvement may be more valuable to the rm, in stark contrast to the non-strategic consumer case. Surprisingly, with strategic consumers, the rm does not necessarily prefer the greatest degree of cost reduction or quality improvement possible, even if it is costless to achieve. We conclude that demand uncertainty and consumer purchasing behavior greatly inuence a rms choice of a product enhancement strategy.
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