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The timing of version releases: A dynamic duopoly model

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  • Ron N. Borkovsky

    (University of Toronto)

Abstract

In many R&D-intensive consumer product categories, firms deliver value to consumers through the quality enhancements provided by new and improved versions of existing products. Therefore, important marketing decisions relate to a firm’s strategy for developing quality enhancements and releasing new versions. This paper explores this type of product development using a dynamic duopoly model that endogenizes each firm’s decisions over how much to invest in R&D and when to release new versions. Specifically, I explore how two key industry fundamentals—the degree of horizontal differentiation and the cost of releasing a new version—affect firms’ product development strategies and, accordingly, the evolution of industry structure. I find that varying the degree of horizontal differentiation gives rise to three distinctly different types of competitive dynamics: preemption races when the degree of horizontal differentiation is low; phases of accommodation when it is moderate; and asymmetric R&D wars when it is high. Furthermore, I find that an increase in the cost of releasing a new version can induce firms to compete more aggressively for the lead and, in doing so, release new versions more frequently despite the higher cost.

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  • Ron N. Borkovsky, 2017. "The timing of version releases: A dynamic duopoly model," Quantitative Marketing and Economics (QME), Springer, vol. 15(3), pages 187-239, September.
    • Handle: RePEc:kap:qmktec:v:15:y:2017:i:3:d:10.1007_s11129-017-9186-9
    DOI: 10.1007/s11129-017-9186-9
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    More about this item

    Keywords

    Product development; Upgrades; Research and development; Innovation; Quality ladder model; Dynamic oligopoly;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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