The Downside of Experimentation: Evidence from Netflix’s Entry into Television

11:30 am September 26, 2018

HBS, Cotting House Conference Room

Abstract: Is experimenting through staged development always worthwhile? The theory of commitment says no, sometimes ceding the right to terminate at an early stage improves final outcomes. However, real options theory makes the opposite prediction: experimentation can only improve final outcomes by using early stage information to obviate later stages with poor outcomes. To address this theoretical tension, I use a setting that historically relied on staged development, new television show development, but shifted away from staged development due to the entry of Netflix. Using a model of incumbent decision making to econometrically exploit this entry as a shock, I find staged development is not always worthwhile. Commitment improves outcomes for the larger networks, possibly because of existing relationships between a new show’s creators and the network developing the show.

Speaker Bio: Ankur Chavda is a PhD student in the Technological Innovation, Entrepreneurship and Strategic Management (TIES) program at MIT Sloan. He researches the incentives for innovation within firms. His job market paper uses Netflix’s entry as a shock to television show production, exploring the trade-off between two approaches to creating innovative products: real options and commitment.

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