The Introduction of New Product Qualities by Incumbent Firms: Market Proliferation Versus Cannibalization

WZB Markets and Political Economy Working Paper No. SP II 2003-11

26 Pages Posted: 14 Apr 2005

Date Written: August 2003

Abstract

This study analyzes the optimal provision of goods in a market characterized by vertical product differentiation. We consider a duopoly model in which incumbents may introduce a new product with certain quality, and decide whether to keep or to withdraw the existing product from the market. We find that the strategic and cannibalization effects dominate, such that no room is left for discrimination among consumers. The innovator always withdraws the existing product from the market, in order to reduce price competition and to avoid cannibalizing its new product demand. In contrast to horizontally differentiated markets, firms are better off not to offer a range or interval of product qualities in vertically differentiated markets. Hence, firms fare better, despite offering a smaller variety of goods.

Keywords: Asymmetric firms, cannibalization, market proliferation, new product introduction, product innovation, vertical product differentiation

JEL Classification: L11, L13, O31, O32

Suggested Citation

Siebert, Ralph, The Introduction of New Product Qualities by Incumbent Firms: Market Proliferation Versus Cannibalization (August 2003). WZB Markets and Political Economy Working Paper No. SP II 2003-11, Available at SSRN: https://ssrn.com/abstract=473703 or http://dx.doi.org/10.2139/ssrn.473703

Ralph Siebert (Contact Author)

Purdue University ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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