Optimal dynamic production and sales plans for innovations in the presence of scarcity effects

Abstract

In this paper, we develop an integrated production and sales planning model for a firm that wants to sell an innovation with a fixed market potential under a supply constraint where a new product diffusion process depends upon word of mouth effects of waiting (lost) applicants in addition to adopters and innovators. This allows us to represent scarcity effects and its consequences namely hype and retarding effects. Under a general complete backorder situation, we show that myopic sales plan that sales as much as possible is a dominant policy when the hype effect exists. We also identify situations where the strategic sales delay plan can be optimal. We then compare our results with the prior research under a stylized lost sales setting. We prove that myopic (build up) plans are optimal in the presence of the hype (retarding) effects. Furthermore, the length of the build up period depends upon the magnitude of the retarding effect We conduct an extensive numerical study which suggests that sales and production plans, profits and capacity sizing decisions strongly depend upon the response of waiting (lost) applicants.