Increasing Quality Sequence : When Is It an Optimal Product Introduction Strategy?

In this paper, we analyze the optimal introduction timing of a seller’s products targeted at segments that differ in their willingness to pay for quality. Past studies suggest that an introduction sequence of a high-quality product followed by a lower quality version of the product may mitigate the cannibalization effects of the low-quality product on profits from the high-quality product. We show that if customers who value quality more possess an outside option such as a substitute product, as may be the case with replacement buyers, a seller may find it optimal to follow a low quality product with a higher quality one, the latter being targeted at the replacement buyers. Further, the ability of the seller to commit to future qualities accentuates the sequential increase in quality in the presence of such buyers. Thus, we show that conditions other than uncertainty or technological improvements occurring over time may justify a seller adopting a strategy of sequentially increasing quality