Reference quality-based competitive market structure for innovation driven markets

a r t i c l e i n f o Innovation-driven durable goods markets see substantial changes in quality and available choice sets and subsequent changes of the reference quality in the market over time. Considering the multi-attribute characteristics of these goods, it is important for businesses to identify attribute-specific competitive landscapes and develop competitive innovation strategies at the product attribute level. Therefore, this paper proposes a reference-dependent choice model for product quality at the product attribute level that can capture the asymmetric effect of innovation shocks on product demand, i.e., the innovation elasticity of demand, as well as the competitive market structure in product innovation. Moreover, we confirm that there is a certain quality span for a product attribute where the values of products depreciate most significantly due to innovation shocks, which we refer to as the innovation shadow zone. We demonstrate the effectiveness of the proposed approach in developing attribute-specific product innovation strategies using U.S. mobile telephone market data. Product innovation is important and rapid in high-tech durable goods markets, such as those for mobile telephones, laptop and desktop computers , and digital cameras, in which companies constantly introduce new, better-quality products and remove older versions. For example, in the electronic chip market, 'Hwang's Law, 1 ' which states that the memory density of electronic chips doubles every year, replaced 'Moore's Law, 2 ' which states that it doubles roughly every two years, in 2002. Due to the nature of rapid innovations in high-tech markets, consumer choice sets in these markets change rapidly, and consumers constantly update their expectations of the standard quality of product attributes. For example, in the desktop computer market, standard CPUs are rapidly replaced by newer versions, e.g., Core Solo by Core Duo; Core 2 Duo; and Core i3, i5, and i7 on an almost annual basis, while the standard capacity of hard disk drives has also improved from 128 G (gigabytes) to 256 G, 500 G, 1 T (terabyte), and currently large SSDs (Solid State Drives) 3 over the past few years. Additionally, the speed of innovation differs across product attributes, generating heterogeneous consumer preferences for products and creating strategic opportunities for companies. Therefore, due to the multi-attribute characteristics of these innovation-based durable products, it is important for businesses to identify attribute-specific competitive landscapes and develop competitive innovation strategies at the product attribute level. This effort is also advisable from the perspective …