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New and improved?

Eric Schmidbauer and Dmitry Lubensky ()

International Journal of Industrial Organization, 2018, vol. 56, issue C, 26-48

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 modified 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 inefficiently high upgrade costs. Nevertheless, the incentive to “show off” 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)
Date: 2018
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International Journal of Industrial Organization is currently edited by P. Bajari, B. Caillaud and N. Gandal

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