In this paper, we consider the case when two profit-maximizing firms enter a new market with a competing product that has a finite (and known) life cycle. Both firms make design decisions simultaneously without information about the other firm's decisions. The order of entry is a function of the two firms' product design levels and design capabilities. The first firm entering the market sets a monopoly price for its product and enjoys a monopoly situation until the second firm enters the market. When the second firm enters the market, both firms simultaneously set (or reset) their product prices knowing the design of both products at that time (and we assume those prices are fixed for the remainder of the product's life).
We develop a game-theoretic model that represents the new product introduction process and show that a subgame-perfect Nash equilibrium occurs under certain conditions defined by the expected product life span, product cost, development time, and customer preferences. Our model shows that product differentiation always arises at equilibrium due to the joint effects of resource utilization, price competition, and product life cycle.
A critical parameter for our model is a product-specific index B that we define; we show how it can be easily calculated from existing data. We then use a numerical example to illustrate managerial implications for a new product development process when the product life span is finite. We show that the strategy of time-based competition is the natural result of firms' improving development capability, reducing product cost, and increasing customer preference. In other words, it is not wise for profit-maximizing firms to arbitrarily shorten product life cycle for the sake of competition, because all firms are worse off. Our results also indicate that the first entrant into the market does not necessarily earn the greatest profit, and that a firm with low-cost advantage or fast design capability might not choose to come to market first to maximize its profit in the product life cycle.
