Technology Timing and Pricing In the Presence of an Installed Base

Abstract

This paper studies a vendor.s timing and pricing strategies to tackle its own installed base when selling a newly improved product. We characterize the market with either a partly- or fully- covered installed base, consumers. relative willingness to pay for the newly improved version of the product, and their relative payoffs from delayed purchase. Instead of using the conventional assumption of constant consumer reservation price, we propose that if consumers already own an existing (old) version of a durable product, their willingness to purchase the newly improved version would increase over time. This effect, interweaving with consumer heterogeneity on valuation of quality and purchase history, may enable perfect intertemporal price discrimination (Salant 1989). We find that upgrade pricing may not be able to differentiate consumers with different purchase history when consumer heterogeneity is sufficiently high. Instead, the vendor would maximize its profit through intertemporal price discrimination, delayed product introduction, or pooling pricing. By overcoming the intractability of studying delayed product introduction in a market with heterogeneous consumers, this study analytically confirms Fishman and Rob.s conjecture (2000) that heterogeneity in consumers. valuation of quality may discourage a vendor to launch a new product. Particularly, consumers. anticipation of future price reduction can lead to delayed product introduction even when the extent of quality improvement embodied in the new product is high.New product introduction, intertemporal price discrimination, delayed product introduction, installed base, upgrade policy