Various strategies to handle cannibalization in a competitive duopolistic market

We investigate an incumbent's optimal sequential introduction of new products over two periods in a competitive duopoly setting. The firm would like to preempt and counter competition from a future entrant. Alternatively, the firm should consider that one of its products might decrease sales for another of their products, a threat commonly known as cannibalization. In this paper, we examine three sequential introduction strategies. We find that a firm's optimal introduction sequence is governed by pressures from competition and cannibalization in the market. In general, competition has greater impact on firms profits than cannibalization. Introducing a high-end product before a low-end product can alleviate cannibalization for a weak entrant. In particular, the profit loss caused by competition is greater than that caused by cannibalization. When competition is intense, firms should consider alleviating the profit loss from competition over cannibalization by introducing a low-end product before a high-end product. In that case, the incumbent's high-end product's quality must be no lower than the entrant's quality but the profit is derived mostly from the mark-up on the low-end product. Much of the high-end product's profit is sacrificed in order to maximize profit from the entire product line. When cannibalization is intense and competition is mild (due to a weak entrant), the incumbent's profit gap between the high-end and low-end products is high. In that case, the firm can no longer afford to sacrifice its high-end products profit and the order of introduction reverses.