Product Introduction Strategy to Signal Network Externality

By Kannan SrinivasanV. Padmanabhan
1994| Working Paper No. 1295

The benefits from using a computer software, and hence the willingness of a customer to pay for it, often depends on the number of other customers using the same software. These benefits have been referred to in the literature as “network externalities”. In addition to application software, network externalities are an important consideration in the marketing of many other high-tech products. We analyze the marketing implications for new product introduction strategies for markets characterized by network externalities. We show that the pattern of the product introduction strategy depends critically on the consumer knowledge of network externalities. A simultaneous launch strategy is optimal for the firm when there is no informational asymmetry between the firm and the consumer about the network externality associated with the product. On the contrary, a sequential launch strategy, wherein the manufacturer launches the product in the first period and then markets upgrades and new releases in subsequent periods, is optimal when consumers are unaware of the externality associated with a product. In this situation, the sequential product introduction strategy becomes a vehicle for information transmission. We show that the consumer can accurately infer the externality associated with the product by observing the launch strategy. This result is derived under conditions of customer heterogeneity. In short, this research posits a potential explanation for sequential product introduction based on efficiency arguments. This is in contrast to arguments that rely on exogenous factors such as technological shocks, quality improvements, cost reductions and/or competitive forces for motivating sequential product introduction.