THE DYNAMIC PRICE-QUALITY DECISION MODEL FOR TWO SUCCESSIVE GENERATIONS OF TECHNOLOGY INNOVATION

Abstract

As most of the high-technology companies are trying to be more demand driven, technological innovation and diffusion become important forces in markets today. They critically affect the fortunes of consumers, firms, and nations. Despite research across many disciplines, many important questions remain unanswered. Effects of fluctuating price and quality on the consumer adoption decision for multi-generation innovation are some of such important research areas in this field. High-technology product comes in generations that consist of substitutable product ranges; consumers' preferences tend to reflect external and internal factors that change over time. Often, two successive generations under the same product category compete in the market. It is anticipated by the consumers that the later generation possesses more advance features. Yet it becomes difficult for the marketing managers to decide on the optimum-level values of marketing mix variables for two competing products under its stable. This paper studies optimal control policies for quality and price when two technology generations are present in a dynamic market and also suggest a policy for the optimal launching time of an advanced generation. Lots of work has already been done to study the optimal policies on explanatory variables such as price, promotional effort, quality, and time for new products. In comparison high-technology products have received less attention. The profit functional used for optimal control in this paper combines well-known diffusion models and the cost function that is capable of estimating the future profit trends. The diffusion model uses the relationship between the repeat purchasers and the new purchasers to study the overall diffusion of a new technology over multiple generations.