Work

Innovation and product positioning: When to add or replace

Year: 2025

Type: article

Abstract: We consider a monopolist firm, currently active in the market, which has the opportunityto innovate by introducing a new product. This involves decisions about thetiming, quality, and positioning relative to the established product. To studythis problem, we use the Hotelling line model. Moreover, we introduce demanduncertainty. The main result is that when the established product is sufficientlyprofitable, it will be replaced by the new product in the long run. This resultis reinforced by demand uncertainty, which at the same time delays the newproduct introduction. Adding the new product alongside the established product so that they are both available for sale after the new product is introduced,may occur when the unit production cost of the new product is small. In thelatter scenario a hysteresis region may arise where the firm waits, while at lowerdemand levels it immediately adds the new product alongside the establishedproduct, and at higher demand levels it immediately replaces the establishedproduct with the new one.

Source: Omega

DOI: 10.1016/j.omega.2025.103327

Authors: Anne G. Balter, Cláudia Nunes, Diogo Pereira, Peter M. Kort

Institutions: Tilburg University, Instituto Superior Técnico, Centro de Matemática Computacional e Estocástica

Language: English

Topic: Merger and Competition Analysis

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Industry, innovation and infrastructure

Open Access status: hybrid

Estimated APC paid: $4,030