Product Introduction Strategies under Sequential Innovation for Durable Goods with Network Effects

Abstract

When network effects are important and technology is rapidly improved, this study explores the relative optimality of five product introduction strategies of a durable goods manufacturer: (1) replacement, (2) skipping, (3) a delayed line, (4) shelving, and (5) line‐extension. Using a two‐period analytical model, we show how the type of compatibility—either full or backward compatibility—and the magnitude of the network effect influence the manufacturer's preference for the above strategies. Our analysis reveals that only the strategies (1)–(3) above can be optimal; and the optimal strategy varies with network strength. Further, the type of compatibility can dramatically change the profitability under each optimal strategy; for instance, while backward compatibility can increase the profitability of replacement under certain conditions, it always reduces the profitability of a delayed line. We also illustrate that if compatibility were a choice, although backward compatibility may be observed widely in practice, the parametric region for its optimality is relatively more restricted than that of full compatibility.