Price-Setting Models for Innovative Products

Modern organizations have abundant choices in selecting the right product supply chain. Functional products are items that are purchased regularly, are widely available from multiple sources, and have long life cycles. Alternatively, innovative products are new to the marketplace, have unpredictable demand, and usually have short life cycles.

Read this article. Researchers suggest that products belong to either a functional or innovative category, where innovative products are much more challenging to price. What innovative products do you own, and how do you know you are getting the value you paid for?


Considering the one-time feature of the manufacturer's decision-making for producing and pricing the innovative product in a monopoly market, we propose the price-setting newsvendor model for an innovative product with the OSDT. Unlike the price-setting newsvendor model with the EU where the optimal retail price and production quantity are obtained based on the weighted average of all possible payoffs' utilities, the price-setting newsvendor model with OSDT determines the optimal retail price and production quantity based on the satisfaction level of its focus point (scenario). Clearly, the proposed model is scenario-based, which is radically different from the lottery-based models.

Active, passive, apprehensive and daring manufacturers are considered in this research. If the profit functions are concave, we have the following conclusions:

The daring manufacturer always imagines a higher profit than the active manufacturer; meanwhile, the active manufacturer imagines higher than a passive manufacturer, and the passive manufacturer imagines higher than an apprehensive manufacturer.
The daring manufacturer has the highest optimal retail price; the active manufacturer has a higher optimal price than the passive manufacturer, and the apprehensive manufacturer has the lowest optimal retail price.

Whichever the manufacturer's type is, decreasing the price sensitivity of the demand is efficient for charging a high retail price in the innovative product market.

Such theoretical results are consistent with the phenomena in the real business world and provide managerial insights into different types of manufacturer's behaviors in a monopoly market. Using the obtained analytic results, several phenomena in the luxury goods market have been well explained. In the near future, we will analyze the channel coordination and personality information sharing in the supply chain.