Sequential versus concurrent final phase product development: approval uncertainty, time-sensitive consumers, asymmetric competition, and government subsidy

Abstract

Should a firm begin its production even before its new product is approved? In a competitive market with time-sensitive consumers, a firm may choose to adopt the “concurrent process” by conducting the approval process and the production process in parallel so that the product will become available for sale once approved. However, to avoid incurring upfront (production related) investments that are nonrecoverable should the product fail to receive approval, a firm may opt for the “sequential process” so that the production process will only begin after approval. But such a sequential process can delay product launch, making the firm less competitive. These trade-offs between the concurrent and sequential development processes and the recent Covid-19 vaccine development motivate us to examine the process choice in the presence of three salient factors: (a) uncertain product approval, (b) time-sensitive consumers, and (c) asymmetric firm competition—firms have different ex ante approval probabilities. Our equilibrium analysis reveals that it is possible for the laggard firm (the firm with lower ex ante approval probability) to aggressively adopt the concurrent process whereas the leading firm (the firm with higher ex ante approval probability) adopts the sequential process. First, as the approval requirement tightens, both firms have a lower chance of receiving approval, and the laggard firm is more likely to adopt the sequential process than the leading firm. Second, as consumers become more time sensitive, the leading firm is more eager to adopt the concurrent process than the laggard firm. Finally, when the firm asymmetry is large, competition does not always soften and both firms may compete directly by adopting the sequential process. We also examine the case when consumers are “forward-looking” instead of “myopic.” We find that forward-looking behavior increases competition and motivates both firms to adopt the concurrent process. Finally, we consider the case when the government offers subsidies to defray the nonrecoverable investments to increase the chance of having an approved product available sooner. Interestingly, we find such a subsidy can backfire resulting in lower consumer welfare and lower profit for the firms especially when consumers are time insensitive.