Market Research and Innovation Strategy in a Duopoly

Dominique  Lauga; Elie  Ofek

Article | Marketing Science | March – April 2009

Market Research and Innovation Strategy in a Duopoly

by Dominique Lauga and Elie Ofek

Abstract

We model a duopoly in which ex-ante identical firms must decide where to direct their innovation efforts. The firms face market uncertainty about consumers' preferences for innovation on two product attributes and technology uncertainty about the success of their R&D investments. Firms can conduct costly market research before setting R&D strategy. We find that the value of market information to a firm depends on whether its rival is expected to obtain this information in equilibrium. Consequently, one firm may forgo market research even though its rival conducts such research and learns the true state of demand. We examine both vertical and horizontal demand structures. With vertical preferences, firms are a priori uncertain which attribute all consumers will value more. In this case, a firm that conducts market research always attempts innovation on the attribute it discovers that consumers prefer and expends more on R&D than a rival that has not conducted market research. With horizontal preferences, distinct segments exist—each caring about innovation on only one attribute—and firms are a priori uncertain how many consumers each segment contains. In this case, a firm that conducts market research may follow a "niche" strategy and attempt innovation to serve the smaller segment to avoid intense price competition for the larger segment. A firm that conducts market research may therefore invest less in R&D and earn lower post-launch profits than a rival that has forgone such research.

Keywords: Profit; Innovation and Management; Demand and Consumers; Duopoly and Oligopoly; Research and Development; Competitive Strategy;

Format: Print

24 pages

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Citation:

Lauga, Dominique, and Elie Ofek. "Market Research and Innovation Strategy in a Duopoly." Marketing Science 28, no. 2 (March–April 2009): 373–396.

Seeking to disrupt the consumer printing market (before being disrupted by others), and in response to customer pain points, in 2013 HP Inc. launched an ink replenishment service called Instant Ink, where customers pay a monthly subscription fee based on the number of pages printed. Replenishment cartridges are automatically sent to the customer prior to running out of ink. The service had reached 7.5 million subscribers by mid 2020 and senior management now expected to scale it substantially. Several growth opportunities were being considered, these included: targeting customers with printers enabled to be part of the service but who declined to join in the past; making instant ink the default option when buying a new printer; adjustments to the pricing tiers and other plan components; more extensive marketing efforts to generate awareness; geographical exansion; broadening the service to laser toners; attacking the remote work space; and thinking about ways to bundle additional elements, such as paper and hardware (printers, computers, etc.). A concrete growth plan to make Instant Ink a multi-billion dollar business was needed before the annual Wall Street analyst conference to be held in the fall of 2020.

Case | HBS Case Collection | September 2020 (Revised October 2020)

Hot Wheels at Mattel: Reinventing the Wheel

Elie Ofek, Andres Terech and Nicole Tempest Keller

In 2017, Chris Down, Global Brand General Manager for Hot Wheels, and his team from the Advanced Play Group within Mattel, Inc., were considering which innovation path to pursue in order to "future proof" the Hot Wheels franchise going forward. Hot Wheels was the number one selling toy in the world (by unit volume), however, play patterns among children were rapidly changing and children were moving on from physical toys to digital play at a younger and younger age. Hot Wheels needed to determine how to respond. One option considered was the development of a new “mixed-play” product that blended physical and digital play. While the mixed play idea was still at an early conceptual stage, it would likely involve embedding a chip into the Hot Wheels die-cast car, turning it into a “smart car” with its own unique identification. Users could play with the smart car in the physical world and on an app, thus offering an opportunity to also appeal to Hot Wheels consumers who were intrigued by digital play. Hot Wheels had made a number of forays into the digital space over the years, through licensing the brand to app and game developers and developing toys with some digital elements. The licensing strategy was low risk, low reward, and Mattel’s own digital development had produced varied results, creating a culture hesitant to take big risks in the digital space. Down knew that a mixed play innovation would require a significant investment in time and resources. However, Hot Wheels parent company, Mattel Inc. had seen revenues and operating income drop for the past three years. It was unclear if Mattel’s new CEO, Margo Georgiadis, would be supportive of the mixed play direction as the cornerstone of Hot Wheels’ growth plan. With Hot Wheels’ 50th anniversary coming up in 2018, Down had to decide whether his team should push for an out-of-the-norm investment in this new mixed play idea or should Hot Wheels focus its time and resources on physical toys, developing a special collection of die-cast cars for the 50th anniversary? Alternatively, should Hot Wheels meet the age compression challenge head on by considerably expanding its pure digital initiatives?

Citation:

Ofek, Elie, Andres Terech, and Nicole Tempest Keller. "Hot Wheels at Mattel: Reinventing the Wheel." Harvard Business School Case 521-015, September 2020. (Revised October 2020.) View Details

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This exercise serves to help students understand the proper role and use of costs in a firm’s pricing decisions. The exercise is designed such that the learning of students evolves across a classroom session, starting from understanding which costs are relevant when setting the price of a product, progressing to a discussion on the wisdom of the traditional “cost-plus” approach to pricing, and ending with a demonstration of how to leverage cost information to construct an iso-profit curve—which, in turn, serves as a useful benchmark to assess possible price changes. These topics emerge as the result of hands-on calculations, where students make recommendations based on the data provided in the exercise, and in-class discussion, where students defend their preferred course of action and reflect on the biases and heuristics that may lead managers to misuse costs in pricing decisions.

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Market Research and Innovation Strategy in a Duopoly

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