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Selling Innovative Products in the Presence of Externalities

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  • Yufei Huang
  • Bilal Gokpinar
  • Christopher S. Tang
  • Onesun Steve Yoo

Abstract

When deciding whether to adopt an innovative product or service, consumers often experience different levels of anxiety (i.e., nervousness) that prompt them to resist purchase (e.g., fear of learning new technologies, disruption of established habits or beliefs). In such cases, consumers’ anxiety is mitigated by “validation” through externality (e.g., the number of early adopters). To reduce consumers’ anxiety, firms can also invest in “familiarization” through promotion (e.g., offering free trials). We conceptualize innovation as a product that engenders anxiety, and present a model that employs a consumer utility model focusing on the psychological dimension. We examine the firm's profit‐maximizing promotion and pricing decisions when selling to forward‐looking consumers in the presence of externality. Our equilibrium analysis reveals that, unlike the conventional wisdom for promoting new products, for anxiety‐inducing innovations with externality, accelerating the speed of adoption through promotion can actually be detrimental to the firm.

Suggested Citation

  • Yufei Huang & Bilal Gokpinar & Christopher S. Tang & Onesun Steve Yoo, 2018. "Selling Innovative Products in the Presence of Externalities," Production and Operations Management, Production and Operations Management Society, vol. 27(7), pages 1236-1250, July.
    • Handle: RePEc:bla:popmgt:v:27:y:2018:i:7:p:1236-1250
    DOI: 10.1111/poms.12864
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    Cited by:

    1. Yuqing Hu & Lijun Meng & Zuqing Huang, 2023. "Pricing and Sales Effort Decisions in a Closed-Loop Supply Chain Considering the Network Externality of Remanufactured Product," Sustainability, MDPI, vol. 15(7), pages 1-26, March.
    2. Duan, Sophia Xiaoxia & Tay, Richard & Molla, Alemayehu & Deng, Hepu, 2022. "Predicting Mobility as a Service (MaaS) use for different trip categories: An artificial neural network analysis," Transportation Research Part A: Policy and Practice, Elsevier, vol. 166(C), pages 135-149.
    3. Zhang, Qiao & Zaccour, Georges & Zhang, Jianxiong & Tang, Wansheng, 2020. "Strategic pricing under quality signaling and imitation behaviors in supply chains," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 142(C).
    4. Chaab, Jafar & Zaccour, Georges, 2024. "Dynamic pricing in the presence of social externalities and reference-price effect," Omega, Elsevier, vol. 122(C).
    5. Suresh P. Sethi & Sushil Gupta & Vipin K. Agrawal & Vijay K. Agrawal, 2022. "Nobel laureates’ contributions to and impacts on operations management," Production and Operations Management, Production and Operations Management Society, vol. 31(12), pages 4283-4303, December.
    6. Hosseini-Motlagh, Seyyed-Mahdi & Choi, Tsan-Ming & Johari, Maryam & Nouri-Harzvili, Mina, 2022. "A profit surplus distribution mechanism for supply chain coordination: An evolutionary game-theoretic analysis," European Journal of Operational Research, Elsevier, vol. 301(2), pages 561-575.
    7. Niu, Baozhuang & Yu, Xinhu & Dong, Jian, 2023. "Could AI livestream perform better than KOL in cross-border operations?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 174(C).
    8. Xi Chen & Yan Liu & Cheng Zhang, 2022. "Distinguishing Homophily from Peer Influence Through Network Representation Learning," INFORMS Journal on Computing, INFORMS, vol. 34(4), pages 1958-1969, July.
    9. Xiaofang Wang & Yaoyao Yang & Jun Zhuang, 2023. "Pricing Decisions with Social Interactions: A Game-Theoretic Model," Decision Analysis, INFORMS, vol. 20(1), pages 40-54, March.
    10. Yang, Jiaquan & Li, Kevin W. & Huang, Jun, 2023. "Manufacturer encroachment with a new product under network externalities," International Journal of Production Economics, Elsevier, vol. 263(C).
    11. Peng, Shuxia & Li, Bo & Zheng, Wei, 2024. "Impact of consumer valuation updating in a competitive software market," Omega, Elsevier, vol. 123(C).
    12. Qin Zhou & Kum Fai Yuen, 2020. "Analyzing the Effect of Government Subsidy on the Development of the Remanufacturing Industry," IJERPH, MDPI, vol. 17(10), pages 1-20, May.
    13. Zhang, Qiao & Chen, Jing & Zaccour, Georges, 2020. "Market targeting and information sharing with social influences in a luxury supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 133(C).

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