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Retailers that sell seasonal products face significant challenges when planning inventory assortment. The incorporation of drop-shipping into their operations, wherein suppliers own and ship products directly to consumers at retailers’ requests, has only complicated these challenges. This study investigates multichannel assortment planning of retailers that sell seasonal products. We first capture structural properties of multichannel retailing of seasonal products through a simple and parsimonious analytical model. The analytical model uncovers key seasonal product attributes that make it more attractive for retailers to allocate a product for sale in the drop-shipping channel than in the store channel. We then empirically assess the findings of the analytical model. Using a rich and unique dataset from the fashion retail industry, we test relationships between product attributes and retailers’ channel choice. The application of a generalized linear latent and mixed model controls for selection bias by jointly estimating retailers’ likelihood of allocating a product’s inventory to the drop-shipping channel and the allocated volume in each channel according to the product’s characteristics. The empirical findings suggest that retailers are less likely to drop-ship products that are colored, irregularly sized, and offered in more style variants. They also unveil cross-channel effects in terms of inventory amounts allocated for sale in each channel according to those characteristics. Our analytical and empirical assessments jointly demonstrate the complementary roles played by drop-shipping and store channels for seasonal products and offer important academic and practical implications.

Problem definition: Firms developing novel and innovative products regularly face a canonical product development and introduction problem: introduce a proven and immediately available product or delay product introduction until the successful development of an advanced version. Academic/practical relevance: Limited access to resources for the development of an advanced version adds another wrinkle to this problem, particularly for cash-constrained start-ups. For such start-ups, the introduction of an on-hand product can generate additional funds to support the development of an advanced product. However, the lower performance of the on-hand product can negatively impact the perception of the firm’s future products and lower future profitability. Methodology: We study the trade-off between revenues that an on-hand product generates for research and development funding and the negative effect it has on future profits. We characterize the optimal introduction timing of the on-hand product as a function of the financial resource constraints, the interdependence between these sequential products and the cost of development. Results: We identify important differences between the optimal product introduction strategies of a start-up and an established firm. Specifically, although it is always optimal for an established firm to accelerate the launch of a better-quality on-hand product, a start-up might find it optimal to delay its launch. The impact of technological failure and different forms of learning on the optimal strategy of the start-up are also explored. We translate our analytical findings into a managerial framework and illustrate these results using examples from the pharmaceutical and medical devices industries.

A firm seeking a business partner, or an individual searching for a life partner, can use an online matching platform not only to efficiently search for available candidates, but also to address two related challenges. First, a match-seeker may not know what candidates would be compatible with them. And second, particularly in the online setting, candidates may misrepresent their credentials. In this paper, we model and analyze whether an online matching platform’s decisions should enhance search with a positioning capability that helps match-seekers determine the subjective compatibility of potential matches (horizontal differentiation), and also whether it should offer an authentication service that enables match-seekers to reliably signal their objective quality (vertical differentiation). We analyze the equilibrium behavior of match-seekers in the presence of uncertainty about both compatibility and quality of potential matches, and show how this behavior impacts the optimal strategy of the platform with respect to positioning and authentication. For instance, positioning and authentication reinforce each other (act as complements) for some levels of market quality and the platform's positioning capability, while they detract from each other (act as substitutes) in others. These results also help us develop guidelines for the platform's pricing decisions. Our findings provide valuable practical insights for owners and operators of match-making platforms, by helping them understand the interplay between these two important and orthogonal features in online matching. .

A key barrier to companies successfully engaging customers in the design of new products is customers fearing that they will be forced to pay much more for the custom products they help design. This fear is justified by the fact that once the customer has invested significant time and effort in co-designing a product, the firm can extract the entire consumer surplus through higher prices. At the same time, the firm allowing its customers to co-design products would be unlikely to commit to a price up front before knowing the complete design of the custom product, since it would then face a significant risk of losing money. In this paper, we develop analytical models for this problem, and show how a firm can motivate its customers to engage in co-design. We also show how offering co-design can impact the firm’s product (line) strategies and the quality of its products, including motivating the firm to increase the quality of its standard product, sometimes even beyond the efficient quality level. The effect of market and firm characteristics on the value of engaging customers in the co-design process is also examined. In addition, we analyze the effects of (a) information asymmetry about the firm’s co-design capability, and (b) competition, on the firm’s decisions regarding co-design. These results provide valuable insights for managers considering investment in technology to support customer co-design. The online appendix is available at https://doi.org/10.1287/isre.2017.0729 .

Firms in a variety of industries offer add-on products to consumers who have previously purchased a base product. We posit that consumers, in making their decisions as to whether to purchase add-ons that complement the base products, find a greater need for the value offered by the add-ons when the “unrecovered” value (i.e., price paid minus the benefits obtained so far) associated with the base products is higher. We conduct experiments that test the proposed hypothesis and examine the strategic implications of such consumer decision making to a firm that sells base product add-on pairs. Consistent with our hypothesis, the experiments show that a consumer's unrecovered value associated with the base product is positively correlated to his likelihood of purchasing the add-on. Formal modeling of this bias shows that firms may find penetration pricing strategies (such as loss leader pricing) suboptimal. Furthermore, the identified bias leads the firm to spend more resources toward enhancing both the base product and the add-on quality, especially so when the add-on will be offered before the consumer has a chance to extensively use the base product. Finally, the effect of competition in the base product market is also considered.

The growing sophistication of component technologies and the rising costs and uncertainties of developing and launching new products require firms to collaborate in the development of new products. However, the management of new product development that occurs jointly between firms presents a new set of challenges in sharing the costs and benefits of innovation. Although collaboration enables each firm to focus on what it does best, it also introduces new issues associated with the alignment of decisions and incentives that have to be managed alongside conventional performance and timing uncertainties of new product development. In this paper, we conceptualize and formulate the joint development of products involving two firms with differing development capabilities and examine the implications of arrangements that go beyond sharing of revenues to include sharing of development cost and work. We term these approaches that involve sharing of the development cost and sharing of the development work investment sharing and innovation sharing, respectively. These cost and effort sharing mechanisms have subtle interactions with the degree to which revenues are shared between firms and the type of development project under consideration. Our analysis shows that investment and innovation sharing are particularly relevant for products with no preexisting revenues, and their benefits also depend on the degree to which revenues are shared between the firms. Whereas investment sharing is more attractive for new-to-the-world product projects with significant timing uncertainty, innovation sharing plays an important role in environments where projects experience product quality uncertainty, firms are similar in their capabilities, and the costs of integration of work across firms can be controlled. Our key contribution involves the modeling of joint work and decision making between collaborating firms and unearthing the complementary role of revenue, cost, and innovative effort sharing mechanisms for new product development. We translate our analytical findings into a managerial framework and illustrate the results with examples from the life-sciences and electronics industries.

Compared to offline matching markets, online matchmaking firms improve search in the matchmaking process, but at the same time, increase the problem of authenticating the features and credentials of prospective matches. This paper examines the interplay between these two processes in online matchmaking, using game-theoretic models. We examine whether an online matchmaking firm should target a broad market of match seekers, or an exclusive group of high-value seekers, and how the firm can use a two-part pricing approach for search and authentication services. Our results provide valuable insights for online matchmaking firms regarding the trade-offs between search and authentication services, and providing guidelines for the pricing and positioning of their services. For instance, we show that the complementarity of the firm's optimal pricing for search and authentication services can lead to the firm offering an authentication service as a loss leader, and that higher quality authentication services may not justify higher authentication fees. We also develop guidelines for the firm's optimal strategies for different market conditions.

A key barrier to companies successfully engaging customers in the design of new products is customers fearing that they will be forced to pay much more for the custom products they help design. This fear is justified by the fact that once the customer has invested significant time and effort in co-designing a product, the firm can extract all the resulting consumer surplus through higher prices. At the same time, the firm allowing its customers to co-design products would be unlikely to commit to a price up front before knowing the complete design of the custom product, since it would then face significant risk of losing money. In this paper, we develop analytical models for this problem, and show how a firm can motivate its customers to engage in co-design. We also show how offering co-design can impact the firm's product (line) strategies and the quality of its products, including motivating the firm to increase the quality of its standard product, sometimes even beyond the efficient quality level. The effect of market and firm characteristics on the value of engaging customers in the co-design process is also examined. In addition, we show that the presence of information asymmetry about the firm's co-design capability may lead to even higher levels of co-design effort by the customer. These results provide valuable insights for managers regarding the potential value of supporting customer co-design.

It has been recognized that when a durable goods manufacturer sells its output, it has an incentive to produce at a rate that will drive down the market price of the product over time. Because anticipation of declining prices makes consumers less willing to invest in owning the durable good, selling can be self-defeating for the manufacturer. If the manufacturer instead leases the product, it can eliminate its own incentive to decrease the price over time, which allows it to extract larger rents from consumers. In this paper, we investigate how a durable goods manufacturer’s choice between leasing and selling is affected by a complementary product that is produced by an independent firm. We show that a durable goods manufacturer that leases its product has an incentive to increase prices (by limiting the availability of the product) in response to the availability of a complement. Because this potential for opportunistic behavior discourages output of the complement, leasing can also be problematic. As a result, the durable goods manufacturer faces a trade-off between leasing, which commits the manufacturer to not overproduce, and selling, which commits it to not underproduce. Our contribution is to identify this trade-off and show how a durable goods manufacturer can use a combination of leasing and selling to balance its strategic commitment across both its own market as well as the complementary market.

Start-up firms, which are by nature cash-constrained, often consider launching an immediately available product to generate funds for developing more advanced products. However, this release could have an adverse effect on the perception of the firm’s future products. A key decision for the start-up firm in such an environment is: when should the first product be released? In this paper we consider the product development and introduction decisions for a start-up which has a product that is ready to launch and is also developing a more advanced product, whose launch readiness is uncertain. We model the tradeoff between the adverse effect of a first version on overall profitability and the valuable stream of revenue it generates for R&D funding. We characterize an optimal policy with cash thresholds to determine when the firm should launch the first version and whether it should continue development. We derive managerial insights by studying these cash thresholds under various technological and market scenarios. Our analysis underscores a fundamental difference between how a start-up and an established firm view commercialization: a start-up would delay the launch of a good first version longer while an established firm (without bankruptcy considerations) would accelerate its launch.

We explore the interactions between channel structure and mode of operations (leasing versus selling) and their implications for a manufacturer's willingness to invest in making her product more durable. Using a centralized manufacturer who leases her product as a point of reference, we find that an isolated change in either the channel structure (centralized to decentralized), or the operational mode (leasing to selling) can decrease the manufacturer's willingness to provide durability. However, if combined, these two changes together may strengthen the manufacturer's willingness to invest in durability. Consequently, a manufacturer who sells through an intermediary may invest more in durability than one who leases directly to end consumers. This result challenges the conventional wisdom in two different paradigms. First, from the perspective that durability is a dimension of quality, it challenges the conventional view that decentralization will decrease a manufacturer's incentive to provide a high quality product. Second, from the perspective of the externality that is created when a firm sells a durable product to strategic consumers who anticipate declining prices, it challenges the conventional view that a manufacturer who leases will provide more durability than one who sells.

Firms in a variety of industries offer addon products to consumers who have previously purchased a base-product. We posit that consumers, in making their decision whether to purchase an addon that complements the base-product, find a greater need for the value offered by the addon when the “unrecovered” value (i.e., price paid minus the benefits obtained so far) associated with the base-product is higher. We conduct experiments that test the proposed hypothesis, and examine the strategic implications of such consumer decision making to a firm who sells base-product addon pairs. Consistent with our hypothesis, the experiments show that the “unrecovered” value associated with the base-product is positively correlated to a consumer's likelihood of purchasing the addon. Formal modeling of this bias shows that firms may find penetration pricing strategies (such as loss-leader pricing) suboptimal. Furthermore, the identified bias leads to the firm spending more resources toward enhancing the both base-product quality and the quality of the addon, especially so when the addon will be offered before the consumer has a chance to extensively use the base-product. Finally, the effect of competition in the base-product market is also considered.

We develop a theory of insurance claim settlement whose structure embodies an insurer’s capacity decision and negotiation between the insurer and claimant in an asymmetrically informed environment. We offer a solution to an insurer’s choice of upfront claim settlement amount under a plausible set of assumptions. Implications from theory are tested with a large sample of liability insurance claims collected over two years in the state of Texas and we find that insurer’s deployment of more capacity to handle a claim and longer settlement times occur for claims with more uncertainty. The empirical results also reveal factors relevant to insurer’s operational choices. Descriptive features of a claim, the age of the claimant and attorney representation on the plaintiff’s side are important determinants of the final settlement amount.

In many technology-intensive industries, the quality of products offered by firms is constrained by the evolution of a core technology. Therefore, incorporating advanced technologies in new products entails delayed product introduction. However, an early launch of a new product provides a firm several enduring advantages such as larger market presence and greater availability of complements. In this work, we try to identify the strategic factors that drive launch-timing decisions under competition. Specifically, we model the entry timing decisions made by two competing firms that face different technological trajectories. By endogenizing the competitive environment as an outcome of entry decisions, we characterize equilibria in the Product Launch Game under a variety of market conditions. We find that competing firms often take different roles as early leaders or technology leaders by entering a market at different times; this allows them to utilize entry timing as an additional dimension to differentiate themselves from their rival. We also analyze the impact of technological trajectories and market factors such as network effects and growth potential on the profitability of various entry strategies. We show that these factors can affect a firm's equilibrium profits in a counter-intuitive fashion. One of our interesting conclusions is that the level of competition in an industry moderates the significance of different factors that influence equilibrium entry strategies. As a result, firms that fail to understand the extent of competition might emphasize the wrong dimensions in making entry decisions.

The growing sophistication of component technologies and the rising costs of product development require firms to collaborate in the development of new products by pooling their resources and entering into resource or cost-sharing arrangements. However, the management of new product development that occurs jointly between a technology supplier and its industrial customer presents a new set of challenges. While such vertical collaboration enables each firm to focus on what it does best and achieve certain economies of specialization, it also introduces new issues associated with the alignment of decisions and incentives that have to be managed alongside conventional performance and timing uncertainties of new product development. In this paper, we conceptualize and formulate the co-development of products involving two firms and examine the implications of two collaboration mechanisms found in industrial practice. We term these approaches which involve sharing of the development cost and sharing of the development work, investment sharing and innovation sharing, and find that they have subtle effects on the degree of product innovation and profits of individual firms, depending on the nature and extent of technological uncertainty, product development cost structure, and complementary relationships with other products. We consider both exogenous and endogenous technology uncertainty, and study the impact of investment and innovation sharing on a firm's technology consideration set, product qualities, and profits. Conditions under which firms should consider one mechanism over the other and over single firm product development are proposed. Our analysis shows that, while investment sharing plays an important role in environments with higher levels of technology uncertainty, innovation sharing can result in greater quality improvements and profits if firms are able to manage the distributed product development process more efficiently. We translate our analytical findings into a managerial framework and illustrate it with examples from the industry.