Delaying product introduction: A dynamic analysis with endogenous time horizon

We consider a capital accumulating incumbent firm which produces an established product and has the option to introduce an improved substitute product to the market by incurring adoption costs. We find that depending on the initial capacities on the established market and the value of adoption costs, three scenarios are possible, namely introducing immediately, later or abstaining from product introduction. In case of delayed product introduction, the incumbent reduces capacities for the established product before the new product is introduced. We find that the higher the adoption costs, the higher is the gain by delaying the product introduction compared to immediate introduction. From a welfare perspective, the product introduction is welfare enhancing but the option of delay decreases the welfare gain. The model is calibrated using data on hard disk and solid state drives.