New and Improved?

Eric Schmidbauer ()
Additional contact information
Eric Schmidbauer: University of Central Florida, Orlando, FL

No 2016-02, Working Papers from University of Central Florida, Department of Economics

Abstract: Are new versions of products necessarily better? We analyze product innovation by a firm that engages in research and development designed to improve an existing product, the outcome of which is uncertain. If the firm adopts the innovation its modi ed product appears to consumers as new and improved, but consumers do not immediately know whether or how much the product is better. We find that new products are on average improved and therefore command a pricing premium. This induces some types to exploit the innovation signal by selling new versions that are only trivially different from their older version or that require ineficiently high upgrade costs. Nevertheless, the incentive to \show o " by introducing a new product may improve total welfare by inducing more innovation adoption and thereby mitigating the standard monopoly underinvestment problem. Firms benefit ex-ante from better consumer information about quality or from committing to not exploit their informational advantage.

Keywords: asymmetric information; signaling; innovation (search for similar items in EconPapers)
JEL-codes: D82 O31 (search for similar items in EconPapers)
Pages: 36 Pages
Date: 2016-03
New Economics Papers: this item is included in nep-com and nep-ino
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://economics.itweb.ucf.edu/workingpapers/2016-02.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cfl:wpaper:2016-02

Access Statistics for this paper

More papers in Working Papers from University of Central Florida, Department of Economics
Bibliographic data for series maintained by Uluc Aysun ().