Now or never? Optimal introduction timing for a product line extension with operational cost considerations

Abstract

Synchronizing marketing and operations decisions is crucial for the success of a firm. We study a problem of determining optimal introduction timing for a line extension product in an integrated inventory (supply) and diffusion (demand) framework. Based on the Bass diffusion model (Bass, 1969), we propose a splitting Bass-like diffusion model to characterize the customer behavior in the adoption of a new product and its line extension variant. The model determines whether and when to introduce the line extension and the corresponding production quantities, while accounting for substitution, diffusion and market segmentation effects. It suggests that the optimal solution existing in the literature becomes suboptimal if operational costs are taken into consideration.