New And Improved?

Keywords

Asymmetric information; Innovation; Signaling

Abstract

Are new versions of products necessarily better? We analyze product innovation by a firm that engages in research and development designed to improve an existing product, the outcome of which is uncertain. If the firm adopts the innovation its modified product appears to consumers as “new and improved,” but consumers do not immediately know whether or how much the product is better. We find that new products are on average improved and therefore command a pricing premium. This induces some types to exploit the innovation signal by selling new versions that are only trivially different from their older version or that require inefficiently high upgrade costs. Nevertheless, the incentive to “show off” by introducing a new product may improve total welfare by inducing more innovation adoption and thereby mitigating the standard monopoly underinvestment problem. Firms benefit ex-ante from better consumer information about quality or from committing to not exploit their informational advantage.

Publication Date

1-1-2018

Publication Title

International Journal of Industrial Organization

Volume

56

Number of Pages

26-48

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1016/j.ijindorg.2017.11.002

Socpus ID

85036606044 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/85036606044

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