Abstract
The aim of the present paper is to analyze how firms that sell durable goods should optimally combine continuous-time operational level planning with discrete decision making. In particular, a firm has to continuously adapt its capacity investments and sales strategy, but only at certain times it will introduce a new version of the durable good to the market. The launch of a new generation of the product attracts new customers. However, in order to be able to produce the new version, production facilities need to be adapted leading to a decrease of available production capacities. We find that the price of a given generation of a product decreases over time. A firm should increase its production capacity most upon introduction of a new product. The stock of potential consumers is largest then so that the market is most profitable. The extent to which existing capacity can still be used in the production process for the next generation has a non-monotonic effect on the time when a new version of the product is introduced as well as on the capital stock level at that time.
Highlights
This paper is about the optimization problem of a firm that sequentially introduces different versions of a durable good on the market
The aim of the present paper is to analyze how firms that sell durable goods should optimally combine continuous-time operational level planning with discrete decision making
A firm has to continuously adapt its capacity investments and sales strategy, but only at certain times it will introduce a new version of the durable good to the market
Summary
This paper is about the optimization problem of a firm that sequentially introduces different versions of a durable good on the market. The so-called Coase conjecture, see Coase (1972), states that a monopolist has to sell the durable good at a price equal to its marginal costs The reasoning behind this conjecture is that consumers are aware that a firm has to lower its price if they do not purchase the product for a given price. In the present paper we confirm that it is optimal to employ such a strategy and discuss how the heterogenous willingness of the consumers to pay for a product as well as capacity restrictions affect the price. We investigate in a rather simple model how the interaction of pricing and capacity investments is affected by the possibility of introducing new generations of a product.
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