Profit Seeking vs. Survival Seeking: Quality Investment by Start-ups under Financial Constraints

盈利訴求 VS. 生存訴求:資金限制下新創企業的質量投資

Student thesis: Doctoral Thesis

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Award date10 Sep 2019

Abstract

To improve the product quality, start-ups under financial constraints will most likely take on debts to support the quality investment. With demand uncertainties, they might face the bankruptcy risk. For example, Tesla, an electric-car manufacturer wins by high product quality, has nearly went bankrupt for many times. Quality investment refers to R&D investment that improves consumers’ preference for product, and eventually increases the firm’s market share. Finance-constrained start-ups need to balance market advantage from high product quality and bankruptcy risk from large R&D investment and demand uncertainties. Here, bankruptcy risk could be reduced by cooperative quality investment, and market advantage could be threaten by product competition. Existing researches about the start-ups’ quality investing issues that utilizing model derivations mainly adopt constrained optimization to obtain the profit-maximizing quality investment, however, this method does not fit start-ups especially. For the bankruptcy risk, the start-ups’ quality investing strategies would target survival rather than profit. This thesis adopts survival threshold to describe the financial constraint, and introduces “survival-seeking objective” to establish theoretical models. We start from the monopoly and cooperative markets, to roundly compare the start-ups’ quality investing strategies under both profit and survival objectives, and then explores how the survival-seeking start-up competes with the profit-seeking established firm.

(1) Quality investing strategies of start-ups in the monopoly market. To compare quality investing strategies under both profit-seeking and survival-seeking objectives with the impacts of demand uncertainties and survival threshold, this section adopts the price and quality dependently linear demand (PQDLD) function, and constructs a two-period model. It assumes that the start-up sells normal products and makes quality investment in the first period, and sells the improved product in the second period. Based on the PQDLD function, this section considers demand uncertainties from consumers’ preference for quality (DRQ) and potential market size, assumes the profit-seeking start-up maximizes the sum of profits over two periods, while the survival-seeking start-up maximizes the product of survival probabilities over two periods. By analytical derivation and numerical analysis, results can be got: 1) If the uncertainty of DRQ increases, the profit-seeking start-up improves its quality investment, while the survival-seeking start-up reduces its investment. 2) If uncertainties of DRQ and market size exist at the same time, the profit-seeking start-up would improve (or reduce) its price and quality at the same time compared with the deterministic environment, while the survival-seeking start-up always links the quality to price positively. 3) If the survival threshold increases, the profit-seeking start-up reduces its quality investment, while the survival-seeking start-up improves the investment first and then reduces. In a word, this section explores the start-up’s motivation for quality investment and internal mechanism of different investing behaviors through mathematical modelling, and provides analytical explanations to the existing empirical results.

(2) Quality investing strategies of start-ups in the cooperative market. When the start-up cooperates with a downstream manufacturer, to compare the start-up’s quality investing strategies under both profit-seeking and survival-seeking objectives with the impacts of demand uncertainties, survival threshold and incentive contracts, this section adopts the PQDLD function, chooses investment-sharing and revenue-sharing contracts, to construct a cooperative quality investing model between an upstream finance-constrained start-up and a downstream manufacturer. Based on the PQDLD function, this section considers demand uncertainty from potential market size and sets DRQ as certain value, assumes that the profit-seeking start-up maximizes the expected profit, while the survival-seeking start-up maximizes the survival probability. By analytical derivation and numerical analysis, results can be got: 1) When the profit-seeking start-up cooperates with the manufacturer, if DRQ is high and demand uncertainty is small, the start-up will invest in higher quality under the revenue-sharing contract; otherwise, it will invest in higher quality under the investment-sharing contract. 2) when the survival-seeking start-up cooperates with the manufacturer, if both DRQ and survival threshold are small, the start-up will invest in higher quality under the investment-sharing contract; otherwise, it will invest in higher quality under the revenue-sharing contract. Further, if the surviving start-up can make sustainable cooperation in the second period, its quality investments under both objectives do not change obviously. However, the investment-sharing contract will be chosen in larger parameter space for the cooperation including the survival-seeking start-up. This section introduces the financial constraint and the survival-seeking objective into the field of supply chain quality management, proposes a new perspective to promote sustainable cooperation in supply chain, that is, improving the survival probability of upstream start-up suppliers.

(3) Quality investing strategies of start-ups in the competitive market. To explore how the start-up competes with the established firm for quality investment level decision with the impacts of demand uncertainty and survival threshold, this section first bases on the vertical product differentiation model, replaces one participant by a finance-constrained start-up, considers the demand uncertainty from consumers’ preference for quality, and finally constructs a duopoly game model for quality investment level decision. This section assumes that the start-up maximizes the survival probability, while the established firm maximizes the expected profit. By analytical proof and numerical solution, results can be got: 1) If the survival threshold is high and the demand uncertainty is low, the start-up will invest in higher quality than the established firm; 2) If the survival threshold is low and the demand uncertainty is high, the start-up will invest in lower quality than the established firm. To further explore how the survival-seeking start-up competes with the profit-seeking established firm for quality investment timing decision with the impacts of demand uncertainty, survival threshold, R&D cost and incentive policies, this section utilizes the horizontal product differentiation model, introduces quality decision, assumes that quality investment can be made in two periods (demand uncertainty exists in the first period, uncertainty resolves in the second period), considers the demand uncertainty from consumers’ preference for product characteristics in the model, and finally constructs a duopoly game model for quality investment timing decision. Besides, we examine two R&D supporting policies, including the direct fund and the quality-dependent subsidy. By analytical derivation and numerical solution, results can be got: 1) The start-up will invest in quality earlier than the established firm, only if the demand uncertainty is high and R&D cost does not decreases largely over time. 2) The start-up will invest in quality early under the direct fund, but reduce its investment level obviously; It will also invest early under the subsidy, but improve its investment. This section introduces the survival-seeking start-up into the product differentiation theory by enriching the mixed oligopolies where participants have different objectives, and helps government design policies for supporting finance-constrained start-up and introducing new technologies.

    Research areas

  • Start-up, Quality Investment, Profit Seeking, Survival Seeking