Optimal pricing of successive generations of product advances

Abstract

We obtain the optimal pricing policy of a monopolist marketing successive generations of product advances. We characterize the impact of foresight regarding entry of the second generation product and the technological substitution and market expansion created by the introduction of the second generation product on the optimalpricing policy of the monopolist. We also obtain the optimal pricing policies of the producers in situations where the successive generations of product advances are marketed by independent producers. By contrasting these policies with those of the monopolist marketing successive generations of product advances, we provide insight on the differential impact of foresight, technological substitution and market expansion on the optimal pricing policies of the producers.