A competitive analysis of fail fast: Shakeout and uncertainty about consumer tastes

• Published in: Journal of economic behavior & organization Vol. 177; pp. 589 - 600
• Main Authors: Meagher, Kieron J., Wong, Arlene, Zauner, Klaus G.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-09-2020
• Subjects: Entry and exit; Fail fast; Lean startup; Market structure; Preference uncertainty; Product life cycle; Salop; Shakeout; Spatial competition; Salop; Market structure; D43; Lean startup; Fail fast; Shakeout; L11; L13; Preference uncertainty; Entry and exit; R32; Product life cycle; Spatial competition
• ISSN: 0167-2681; 1879-1751
• DOI: 10.1016/j.jebo.2020.06.033

•We analyze the market implications of the “fail fast” business strategy.•Firms’ uncertainty about consumer preferences is key in new economy industries.•The reduction of firms’ uncertainty about consumer preferences leads to shakeout.•Shakeout is the reduction of the number of firms over the product’s life cycle.•We provide a 2-dimensional extension to Salop’s (1979) circle model.
Contemporary business strategy advocates “fail fast”, the practice of launching a product early, before the resolution of uncertainty about how product characteristics matter to consumers. We consider how uncertainty about consumer preferences can contribute to shakeout when moving from the infant stage of an industry, when this uncertainty is large, to the mature stage of an industry, when this uncertainty is small. We find that, consistent with the empirical literature, due to firms’ uncertainty about consumers’ preferences, there is excessive entry initially and, on average, positive shakeout in the number of firms in the market in the mature phase of the industry. The paper also presents a new way to model uncertain preferences in product differentiation models that may prove useful in other applications.