FLEXIBILITY AND PRICING DECISIONS FOR HIGH-VOLUME PRODUCTS WITH SHORTLIFE-CYCLES

We examine the competitive implications of a firm's ability to change over its facility for the manufacture of successive generations of hig h-volume products with short life cycles. This ability is known as cha ngeover flexibility. The model introduced extends the existing literat ure in several directions. First, the model offers explicit treatment of the critical relationships between market entry time, changeover fl exibility, product life cycles, and profit. Second, the model explicit ly considers the effect of early market entry on the accumulation of m anufacturing experience (learning), which reduces the unit production cost. Third, the product's optimal selling price is determined and its relation to the firm's changeover flexibility is examined. Last, faci lity flexibility is permitted to vary over a continuum. Therefore, we are able to capture decision making concerning the optimal degree of c hangeover flexibility. Both analytic and numerical results are reporte d, demonstrating the link between the operations and marketing domains in the context of a firm's optimal entrance and exit strategies. Amon g the key findings are (1) a firm more capable of reducing operating c osts through learning over short life cycles optimally invests in more changeover flexibility, charges higher prices, and obtains greater pr ofit; and (2) as the cost of flexible technologies decrease, a firm op timally increases its investment in changeover flexibility, enters mar kets earlier, and charges higher average prices over the product's lif e cycle.