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The timing of version releases: A dynamic duopoly model

Ron N. Borkovsky ()
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Ron N. Borkovsky: University of Toronto

Quantitative Marketing and Economics (QME), 2017, vol. 15, issue 3, 187-239

Abstract: Abstract In many R&D-intensive consumer product categories, firms deliver value to consumers through the quality enhancements provided by new and improved versions of existing products. Therefore, important marketing decisions relate to a firm’s strategy for developing quality enhancements and releasing new versions. This paper explores this type of product development using a dynamic duopoly model that endogenizes each firm’s decisions over how much to invest in R&D and when to release new versions. Specifically, I explore how two key industry fundamentals—the degree of horizontal differentiation and the cost of releasing a new version—affect firms’ product development strategies and, accordingly, the evolution of industry structure. I find that varying the degree of horizontal differentiation gives rise to three distinctly different types of competitive dynamics: preemption races when the degree of horizontal differentiation is low; phases of accommodation when it is moderate; and asymmetric R&D wars when it is high. Furthermore, I find that an increase in the cost of releasing a new version can induce firms to compete more aggressively for the lead and, in doing so, release new versions more frequently despite the higher cost.

Keywords: Product development; Upgrades; Research and development; Innovation; Quality ladder model; Dynamic oligopoly (search for similar items in EconPapers)
JEL-codes: C73 D43 L13 M31 (search for similar items in EconPapers)
Date: 2017
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