Timing successive product introductions with demand diffusion and stochastic technology improvement

This paper considers a firm's decisions on the introduction timing for successive product generations. We examine the case where a firm introduces multiple generations of a durable product for which demand is characterized by a demand diffusion process. Under fixed introduction costs, we consider the case where available product technology improves stochastically. As such, delaying introduction to a later date may lead to the capture of further technology improvements, potentially at the cost of slowing sales for the existing product (and a decline in market potential for the product to be introduced, given our focus on durable products). We specify a state-based model of demand diffusion and construct a decision model to solve the firm's introduction timing problem. By incorporating technology improvement in our model, we prove the optimality of a state dependent threshold policy governing the firm's product-introduction decisions. Numerical analysis reveals the influence of key model parameters on the pace of product introduction. Our model helps to explain the product introduction behavior of firms and provides an alternative to previous explanations of IBM's introduction timing decisions for successive generations of its mainframe computers.