Gaining Ground by Stepping Off the Technology Treadmill

In some technology markets, we occasionally observe that with a new generation of product a firm replaces a traditional feature with a new feature rather than continue to escalate the traditional key performance dimension(s). For example, Nintendo's new Wii video game system introduces an easier-to-use interface rather than push the technology to High Definition gaming as in Sony's PS3 and Microsoft's Xbox 360 game systems. We examine the conditions under which a firm will find this to be an optimal strategy. In our model, two firms compete on a traditional dimension and on price in the current period, where the simultaneous equilibrium outcome yields a high-tech product and a lower-tech product. In the next period, each firm (in addition to choosing its product performance along the traditional dimension) decides whether or not to introduce a new feature for its product. Customer preferences for the new feature can be either positively or negatively correlated with preferences for the key performance dimension and we model the case where one end of the market dislikes the new feature (compared to the traditional) while the other end likes it. For example, when Nintendo announced their new interface, the core gamers ridiculed it as a gimmick, while current non-gamers were drawn to the easier-to-use characteristic of the new feature. We find there are conditions under which neither, both, or only one firm's product comes equipped with the new feature. In the case where preferences are negatively correlated, we find that the lower-tech firm introduces it under a wider range of parameter values than the high-tech firm, but interestingly prefers that the new feature be only marginally attractive to existing users. Alternatively, if preferences are positively correlated, we find that the high-tech firm introduces it under a wider range of parameter values, but the lower-tech firm is once again the the biggest beneficiary if not too many customers like the new feature.