INTRODUCTION SEQUENCE WITH FUNCTIONALITY THRESHOLD AND REAL OPTION
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Existing literature on introduction sequence mostly argues against introducing a low-end product before a high-end product. In this paper, The author presents a simple model to show when it can be optimal to introduce a low-end product first. Based on some observations in industry, high-end consumers are not only wealthier, but also more demanding in quality. With this property, introducing a low-end product first without commitment would not cannibalize the high-end segment because it does not satisfy the quality requirements of the high-end consumers. He also allows for a stochastic environment: the firm may find it valuable to retain flexibility, or the so-called 'real options', rather than make commitment about forthcoming products. With this model setup, the author adds a different perspective that it can be optimal to introduce a low-quality product first for purely marketing reasons. He shows that functionality thresholds can play the same role as Piguovian third degree discrimination.
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