New product introductions with unique and common features

Firms have to determine the right features and price for their new products as they introduce new ones to the market. While doing so, they are challenged to respond to the changes whether it is coming from their customers or competitors. In this dissertation, we focus on the problem of determining the optimal features of new products to be introduced into the market and its pricing as well as whether to discontinue the old product or keep it with the new one in case of a monopoly. We first focus on a monopolistic environment and consider the firm's problem of determining the optimal unique and common features for its new product given an existing product offered by the same firm, setting the optimal prices of both products, and finally deciding whether to still offer the old product alongside with the new one. We contribute to the literature by modeling a new product introduction problem of a monopolistic firm using discrete features and further differentiating between the unique and the common features to better capture the demand substitution effect. We then characterize and analytically solve the underlying model under linear cost, demand, and price functions to determine, in linear time, the optimal features of a new product as well as the optimal rollover strategy and the optimal prices for both the old and the new products of the firm. With our model, firms can express the product quality and price in terms of its unique and common features, and determine the optimal features for its new product without the necessity of going through all possible feature combinations. Our work in this chapter is also the first one to analyze the firm's rollover decision by using discrete product features. We then consider the problem of determining the features and prices of two competing firms' products in a duopoly where the firms introduce their products sequentially. The first firm introduces a product by determining the features and the price of its new product by anticipating the second firm's new product. The second firm then competes with both the product and price by introducing its new product after observing the first firm's product. We also comment on the case in which the second firm cannot change its offered product and consequently only responds with a pricing decision. We contribute to the literature with our model by capturing the product substitution effect on the feature quality level which also allows us to directly capture the effect of commonness and uniqueness of features on substitution effects. The advantage of our model is crucial in settings where the set of potential features and feature levels is finite and small such that it cannot be approximated by continuous variables. In the last part, we further explore product entry decisions with feature and quality level selections in monopoly and duopoly settings by extending the analysis from the second part. We first consider the simultaneous entry setting where the firms do not know the competitor's product choice beforehand and have to commit to their decision. Second, we consider a new product entry from one firm and a price-only response from the other firm subsequently over multiple periods. We then consider the setting where the second firm has a probability over its decision on whether to enter with a new product or respond with only a price. Lastly, we consider a monopolistic firm that tries to maximize its total profit by allocating features and quality levels to its two products having their own brands. The results in these settings complement our contributions from the previous part by showing that modeling products using unique and common features with varying quality levels is not only fully defining the products but also expandable to different settings that can capture the various market dynamics that can occur between the competitors and the competing products. In summary, we model and analyze the firms' selection of unique and common features for their new products in monopolistic and competitive market settings. We derive insights from analytical and numerical results that would help the managers to decide under these settings.