New Differentiated Product with Disadvantage

This paper examines what happens when a new differentiated product with some disadvantage to the existing product is introduced, depending on whether it is the incumbent monopolist or an entrant that introduces the new product. The disadvantage is represented as a positive cost consumers must incur when purchasing the new product. This cost may be related to search cost, switching cost or any inertia of consumers. When the new product has no disadvantage and the total demand is inelastic to equilibrium price, social welfare is identical regardless of whether it is the incumbent or the entrant who offers the new product. If the new product has disadvantage, the resulting welfare level is generally lower due to the disadvantage cost. But with disadvantage, the incentive to offer the new product is lessened, which is socially better. Finally, the entrant tends to be more aggressive in the sense that it may enter even when the incumbent would not offer the new product under the same conditions.