Product Innovation of an Incumbent Firm: A Dynamic Analysis

CentER Discussion Paper Series No. 2018-048

38 Pages Posted: 9 Dec 2018

See all articles by Verena Hagspiel

Verena Hagspiel

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology

Kuno Huisman

Tilburg University - Department of Econometrics & Operations Research

Peter M. Kort

Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER)

Cláudia Nunes

University of Lisbon - CEMAT

Rita Pimentel

University of Lisbon - CEMAT

Date Written: November 15, 2018

Abstract

In case of a product innovation firms start producing a new product. While doing so, such a firm should decide what to do with its existing product after the firm has innovated. Essentially it can choose between replacing the established product by the new one, or keep on producing the established product so that it produces two products at the same time. The aim of this paper is to design a theoretical framework to analyze this problem. Due to technological progress the quality of the newest available technology, and thus the quality of the innovative product that can be produced by this technology, increases over time. The implication is that a later innovation enables the firm to produce a better innovative product. So, typically the firm faces the tradeoff between innovating fast, which boosts its profits soon but only by a small amount, or innovating later, which leads to a larger payoff increase. The drawback here is that the firm is stuck with producing the established product for a longer time. We fund that a highly uncertain economic environment makes the firm delay abolishing the old product market. But if the innovative market is more volatile, the firm enters the market sooner, provided it will be active on the old market, at least for some time. Moreover, the smaller the initial demand for the innovative product market, the better the quality of the innovative product needs to be for the product innovation to be optimal.

Keywords: Product Innovation, Technology Adoption, Dynamic Programming

JEL Classification: C61, D81, O33

Suggested Citation

Hagspiel, Verena and Huisman, Kuno and Kort, Peter and Nunes, Cláudia and Pimentel, Rita, Product Innovation of an Incumbent Firm: A Dynamic Analysis (November 15, 2018). CentER Discussion Paper Series No. 2018-048, Available at SSRN: https://ssrn.com/abstract=3285020 or http://dx.doi.org/10.2139/ssrn.3285020

Verena Hagspiel (Contact Author)

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology ( email )

NO-7491 Trondheim
Norway

Kuno Huisman

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands

Peter Kort

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

HOME PAGE: http://center.uvt.nl/staff/kort/

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

Cláudia Nunes

University of Lisbon - CEMAT ( email )

Av. das Forças Armadas
Lisboa, 1749-016
Portugal

Rita Pimentel

University of Lisbon - CEMAT ( email )

Lisboa, 1749-016
Portugal

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