The Impact of an Integrated Marketing and Manufacturing Innovation

An integrated marketing and manufacturing innovation in this paper is a new substitute product having different attributes and ( possibly) a different unit cost than the current products. We develop a simple single period model that is a variation of an existing model, the vertically differentiated products model: There are two competing substitute products, and customers will buy at most one of them. Our contribution is to allow new relationships between the valuations of the two products by potential customers as well as different until production costs. We identify equilibrium prices, market shares, and profit for the case of (1) two competing firms, one for each product, and (2) one (monopolistic) firm offering both products. Two possible scenarios result from our linear reservation price curve model: High-end encroachment, in which the new product attracts the best customers (those with the highest reservation prices), and low-end encroachment may help explain why an incumbent sometimes fails to recognize the threat of an entrant’s product, as we illustrate with an example from the disk drive industry. Using the specific functional forms of our model, we develop a single numerical measure, called the degree of product/process innovation, that determines the market consequences of introducing the new product. Thus, we offer insight into the value of both a marketing objective (enhancing the product design attributes) and a manufacturing goal (lowering the production cost) in a product and/or process improvement project.