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.