New Product Development in a Durable Good Monopoly Market

Ted Klastorin () and Param Vir Singh ()
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Ted Klastorin: University of Washington
Param Vir Singh: Carnegie-Mellon University

A chapter in Models and Methods in Economics and Management Science, 2014, pp 131-151 from Springer

Abstract: Abstract We investigate the market for a monopolist who introduces a rapidly innovating durable good that is characterized by significant R&D costs. We assume that the monopolist is planning to introduce multiple upgrades or versions during the finite life of this product. Following previous work, we assume that the development costs increase quadratically as a function of the design/quality of the product. We assume that consumers, who enter the market according to a modified Bass-type diffusion process, purchase a copy of the product if their utility surplus is positive. Consumers who purchase the first version are offered an upgraded version at a discounted price when the upgraded version is available. The monopolist must set the level of design/quality and price for each version as well as the timing of each new upgrade’s introduction. We develop a model to analyze the monopolist’s product introduction problem. Our model suggests a number of important insights; for example, we show that the upgrade price is a simple function of the difference between the design levels of first and second versions, and why a monopolist may offer free products. In addition, we prove an important relationship between the optimal revenue and development cost for monopoly markets.

Keywords: Marginal Utility; Market Segment; Durable Good; Development Cost; Monopoly Market (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:spr:isochp:978-3-319-00669-7_8

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DOI: 10.1007/978-3-319-00669-7_8

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