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New Product Development in a Durable Good Monopoly Market

In: Models and Methods in Economics and Management Science

Author

Listed:
  • Ted Klastorin

    (University of Washington)

  • Param Vir Singh

    (Carnegie-Mellon University)

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.

Suggested Citation

  • Ted Klastorin & Param Vir Singh, 2014. "New Product Development in a Durable Good Monopoly Market," International Series in Operations Research & Management Science, in: Fouad El Ouardighi & Konstantin Kogan (ed.), Models and Methods in Economics and Management Science, edition 127, pages 131-151, Springer.
    • Handle: RePEc:spr:isochp:978-3-319-00669-7_8
    DOI: 10.1007/978-3-319-00669-7_8
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