We consider a monopolistic firm that launches newer generations of a given technology product over time. The firm develops technology continuously and, at every time, has the option of releasing a new version of the product that captures the current technology level, at the expense of incurring a fixed launch cost. Consumers purchase newer models only if that maximizes their own future discounted surplus. We assume that consumers have a common valuation for the product and study two different scenarios: one where the firm does not announce future release dates and other where the firm announces and commits to a schedule of product releases. We fully characterize the firm's optimal product launch policy and the consumers' optimal response for both scenarios. We find that when the firm's launch policy is unannounced, the equilibrium of the game is for the firm to release product cyclically at the optimal frequency for the consumers. When the firm commits to a launch policy, it is able to shorten the consumers' purchasing cycles thereby selling products more often. Furthermore, we show that the optimal policy for the firm consists of alternating short and long launch cycles. We find that the potential benefit of committing to a launch policy is typically quite large both in case where the product's retail price is exogenous and where the firm optimizes its price as well. Finally, we generalize the model to multiple customer classes that have different valuations for the product. We show that the optimal launch policy under equilibrium constraints can be formulated as a mixed-integer program and solve the problem for different market compositions. We show that even if there are no launch costs, the misaligned incentives between the firm and its customers force the firm to couple the launch dates for the different customer classes.
Jigar Patel is a PhD student in Operations Management at the Stern School of Business of NYU. He is interested in revenue management, game theory, and in particular applications related to the product innovation and development. Prior to joining Stern, Jigar completed his B.Sc. in Mathematics and Computer Science from the Chennai Mathematical Institute.