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Loyal customer bases as innovation disincentives for duopolistic firms using strategic signaling and Bayesian analysis

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Abstract

In this paper we model the strategic behavior of firms competing in duopolistic environments with a loyal customer base and formalize their decision to delay the introduction of the most technologically developed product available. The proposed model extends and complements the partial approaches studied in the economic, management and operations research literatures. The former emphasizes the role of the strategic knowledge spillovers that may take place among competing firms because of their incentives to introduce technologically superior products while assuming the acceptance of such products by customers as given. The second defines its technology acceptance model based on the demand side of the economic system without considering the resulting strategic interactions that arise among the firms. The latter addresses the effect that signals about a new technology have on the information acquisition behavior of decision makers (DMs) but does not consider the capacity of DMs to account for several product characteristics and their interaction when acquiring information. Using a duopolistic innovation game model we illustrate how the existence of loyal customer bases allows for higher expected payoffs when generating monopolized markets but decreases the incentives of firms to introduce the most technologically developed product available. The signaling equilibria of the game are determined by demand-based factors and the incentives of customers to acquire information on the existing products in the market. Among the main implications of our model is also the fact that the availability of decision support systems that can be used by DMs through their information acquisition processes would improve the quality of the technology being introduced in the market and increase the firms’ probability of success.

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Acknowledgments

The authors would like to thank the anonymous reviewers and the editor for their insightful comments and suggestions.

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Authors and Affiliations

  1. Business Systems and Analytics Department, Distinguished Chair of Business Analytics, La Salle University, Philadelphia, PA, 19141, USA

    Madjid Tavana

  2. Business Information Systems Department, Faculty of Business Administration and Economics, University of Paderborn, 33098, Paderborn, Germany

    Madjid Tavana

  3. Department of Mathematics and Statistics, York University, Toronto, M3J 1P3, Canada

    Debora Di Caprio

  4. Polo Tecnologico IISS G. Galilei, Via Cadorna 14, 39100, Bolzano, Italy

    Debora Di Caprio

  5. School of Economics and Management, Free University of Bolzano, Piazza Università 1, 39100, Bolzano, Italy

    Francisco J. Santos-Arteaga

  6. Departamento de Economía Aplicada II Facultad de Económicas, Universidad Complutense de Madrid, Campus de Somosaguas, 28223, Pozuelo, Spain

    Francisco J. Santos-Arteaga

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  1. Madjid Tavana
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  2. Debora Di Caprio
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  3. Francisco J. Santos-Arteaga
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Correspondence to Madjid Tavana.

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Tavana, M., Di Caprio, D. & Santos-Arteaga, F.J. Loyal customer bases as innovation disincentives for duopolistic firms using strategic signaling and Bayesian analysis. Ann Oper Res 244, 647–676 (2016). https://doi.org/10.1007/s10479-016-2114-7

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