Leveraging online customer reviews in new product development: a differential game approach
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Leveraging online customer reviews in new product development: a differential game approach Wei Liu1
· Ke Xu1 · Ruirui Chai1,2
· Xiang Fang3
Accepted: 29 August 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Large volumes of online product reviews generated by customers have important strategic values for new product development. We consider a duopoly setting where two manufacturers aim to develop their own new products and services. Applying a differential game framework, we examine how online customer reviews can be leveraged as external knowledge for manufacturers to develop new products. In our base models, we assume that the products supplied by the manufacturers are homogenous. First, we consider a closed innovation setting as a benchmark case in which both manufacturers develop new products by their internal R&D without leveraging online customer reviews. Second, we propose a model in which one manufacturer leverages online customer reviews as external knowledge, while the other manufacturer only relies on internal R&D effort. We derive analytical equilibrium solutions to both models. We find that when one manufacturer uses online customer reviews, if the manufacturer’s R&D process becomes more effective in improving its new product performance or reducing its cost, it certainly hurts the other manufacturer, but it may sometimes hurt this particular manufacturer as well. Furthermore, we demonstrate that when the manufacturer utilizes online customer reviews more in R&D, both manufacturers’ profits can either increase or decrease. In an extended model, we relax the product homogeneity assumption and obtain the equilibrium solution analytically. We show that main managerial insights still hold in the extend model. Keywords Online customer reviews · New product development · Customer agility · Customer involvement · Differential game
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Ruirui Chai [email protected]
1
School of Management Science and Engineering, Dongbei University of Finance & Economics, Dalian 116025, Liaoning, China
2
School of Management and Economics, North China University of Water Resources and Electric Power, Zhengzhou 450046, Henan, China
3
Sheldon B. Lubar School of Business, University of Wisconsin-Milwaukee, Milwaukee 53201, WI, USA
123
Annals of Operations Research
1 Introduction Nowadays, global competition becomes increasingly intense, and technology advances more quickly than ever. Therefore, innovation becomes essential to ensure a firm’s survival and growth in such a dynamic business environment. Companies are willing to invest considerable resources in research and development (R&D) for new product development (NPD). NPD is an innovation process that conceives better new products, which are different or unique in some ways from existing products (Chesbrough 2006a, b). A recent study finds that the main reason for low returns on NPD is lack of knowledge about market needs (CB Insights 2018). Because of the information asymmetry between firms and customers, firms need to find
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