Reference quality-based competitive market structure for innovation driven markets Wonjoon Kim a, ⁎, Minki Kim b, ⁎⁎ a Department of Business and Technology Management, Korea Advanced Institute of Science and Technology (KAIST), 373-1 Guseong-dong, Yuseong-gu, Daejeon 305-701, Republic of Korea b College of Business, Korea Advanced Institute of Science and Technology (KAIST), 85 Hoegiro, Dongdaemun-gu, Seoul 130-722, Republic of Korea abstract article info Article history: First received on March 17, 2014 and was under review for 5 months Available online 12 January 2015 Keywords: Reference quality Innovation-driven durable goods Competitive market structure Product innovation Innovation elasticity Innovation-driven durable goods markets see substantial changes in quality and available choice sets and subse- quent changes of the reference quality in the market over time. Considering the multi-attribute characteristics of these goods, it is important for businesses to identify attribute-specific competitive landscapes and develop com- petitive innovation strategies at the product attribute level. Therefore, this paper proposes a reference-dependent choice model for product quality at the product attribute level that can capture the asymmetric effect of innova- tion shocks on product demand, i.e., the innovation elasticity of demand, as well as the competitive market struc- ture in product innovation. Moreover, we confirm that there is a certain quality span for a product attribute where the values of products depreciate most significantly due to innovation shocks, which we refer to as the innovation shadow zone. We demonstrate the effectiveness of the proposed approach in developing attribute- specific product innovation strategies using U.S. mobile telephone market data. © 2015 Elsevier B.V. All rights reserved. 1. Introduction Product innovation is important and rapid in high-tech durable goods markets, such as those for mobile telephones, laptop and desktop com- puters, and digital cameras, in which companies constantly introduce new, better-quality products and remove older versions. For example, in the electronic chip market, ‘ Hwang's Law, 1 ’ which states that the memory density of electronic chips doubles every year, replaced ‘Moore's Law, 2 ’ which states that it doubles roughly every two years, in 2002. Due to the nature of rapid innovations in high-tech markets, consumer choice sets in these markets change rapidly, and consumers constantly update their expectations of the standard quality of product attributes. For example, in the desktop computer market, standard CPUs are rapidly replaced by newer versions, e.g., Core Solo by Core Duo; Core 2 Duo; and Core i3, i5, and i7 on an almost annual basis, while the standard capacity of hard disk drives has also improved from 128 G (gigabytes) to 256 G, 500 G, 1 T (terabyte), and currently large SSDs (Solid State Drives) 3 over the past few years. Additionally, the speed of innovation differs across product attributes, generating heterogeneous consumer preferences for products and creating strategic opportunities for companies. Therefore, due to the multi-attribute characteristics of these innovation-based durable products, it is important for businesses to identify attribute-specific competitive landscapes and develop compet- itive innovation strategies at the product attribute level. This effort is also advisable from the perspective of multi-attribute portfolio manage- ment because of the distinct impacts of product innovations across different product attributes. Moreover, previous literature suggests that consumers' choices are mainly influenced by only some key prod- uct attributes (Bettman & Park, 1980; Nowlis, Dhar, & Simonson, 2010; Shi, Wedel, & Pieters, 2013). Therefore, in this study, we suggest a new approach to analyzing com- petitive market structure at the product attribute level using the concept of reference quality. The reference effects of product attributes have been found to have a significant impact on consumer choice (Kalwani, Yim, Rinne, & Yoshi, 1990; Kalyanaram & Little, 1989; Kalyanaram & Winer, 1995; Lattin & Bucklin, 1989; Mazumdar & Papatla, 2000; Rust, Inman, Jia, & Zahorik, 1999; Rust & Oliver, 2000; Tversky & Kahneman, 1991; Winer, 1986). This finding has an important strategic implication for product innovation at the product attribute level, such as asymmetric gain and loss in consumer product values from quality improvement. Since Tversky and Kahneman (1991) introduced the importance of a ref- erence point on consumer utility in their prospect theory framework, many succeeding studies have documented reference effects for both product attributes and price (Hardie, Johnson, & Fader, 1993; Kalwani et al., 1990; Kalyanaram & Little, 1989; Kalyanaram & Winer, 1995; Intern. J. of Research in Marketing 32 (2015) 284–296 ⁎ Corresponding author. Tel.: +82 42 350 4336. ⁎⁎ Co-corresponding author. Tel.: +82 2 958 3512. E-mail addresses: wonjoon.kim@kaist.edu (W. Kim), minki.kim@kaist.ac.kr (M. Kim). 1 Samsung has doubled the memory density of its products every year since 2002. The company dubbed this phenomenon “Hwang's Law” that year after Hwang Chang-gyu, the former head of Samsung Electronics' semiconductor business (Richter, 2014). 2 Moore's Law was based on a 1965 observation by Intel co-founder Gordon Moore, who claimed that the computing power of chips doubles every 18 months. 3 SSD uses electronic interfaces compatible with traditional blockinput/output (I/O) hard disk drives, thus permitting simple replacement in common applications. SSD differs from tradition- al electromechanical magnetic disks, such as hard disk drives (HDDs) or floppy disks, which contain spinning disks and movable read/write heads. Compared with electromechanical disks, SSDs are typically more resistant to physical shock, run silently, and have less access time. http://dx.doi.org/10.1016/j.ijresmar.2014.10.003 0167-8116/© 2015 Elsevier B.V. All rights reserved. Contents lists available at ScienceDirect Intern. 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