Flexibility and pricing decisions for high-volume products with short life cycles

We examine the competitive implications of a firm's ability to change over its facility for the manufacture of successive generations of high-volume products with short life cycles. This ability is known as changeover flexibility. The model introduced extends the existing literature in several directions. First, the model offers explicit treatment of the critical relationships between market entry time, changeover flexibility, product life cycles, and profit. Second, the model explicitly considers the effect of early market entry on the accumulation of manufacturing 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, facility flexibility is permitted to vary over a continuum. Therefore, we are able to capture decision making concerning the optimal degree of changeover flexibility. Both analytic and numerical results are reported, demonstrating the link between the operations and marketing domains in the context of a firm's optimal entrance and exit strategies. Among the key findings are (1) a firm more capable of reducing operating costs through learning over short life cycles optimally invests in more changeover flexibility, charges higher prices, and obtains greater profit; and (2) as the cost of flexible technologies decreases, a firm optimally increases its investment in changeover flexibility, enters markets earlier, and charges higher average prices over the product's life cycle.