Abstract
This paper considers product differentiation in view of a monopolist’s incentive to introduce a new version of his product over time when the monopolist can use trade-in programs in two-period model. Contrary to previous literature, we assume that the upgraded product, which is based on the existing product and forward compatible with the new product, can be provided in the second period. The above assumption reflects on the coexistence of new and upgrade products in the real marketplace. Moreover, we assume that the new product can be either an improved product or a downgraded product compared to the product provided in the first period. The following conclusions come from these assumptions: In case of the improved product, trade-in programs can increase social welfare. However, in case of the downgraded product, trade-in programs can lead to reduced social welfare, which could be avoided by prohibiting them.
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