Delaying Product Introduction in a Duopoly: A Strategic Dynamic Analysis

We analyze the optimal timing for the introduction of a new product in a duopoly. Two incumbent firms are active on a homogeneous product market and one of these firms has an option to additionally introduce a new product, thereby incurring costs of product adoption. We assume that the innovator can commit on the time of product introduction and numerically derive the optimal introduction time as well as the associated Markov-perfect equilibria for investment in production capacities. We find that depending on the initial capacities for the established product and the size of the adoption costs, three scenarios are possible for the innovator: innovating immediately, delaying introduction, and abstaining from product introduction. In case of delayed introduction, the innovator strategically reduces capacities on the established market prior to product introduction, whereas the dynamics of the non-innovator’s capacity is ambiguous. Furthermore, in this case, the firm commits to a market introduction time such that at the time of market introduction it has incentives to further delay the product adoption.