Delaying Product Introduction : A Dynamic Analysis with Endogenous Time Horizon

We consider a capital accumulating incumbent firm which produces an established product and has the option to introduce an improved substitute product to the market by incurring adoption costs. We find that depending on the initial capacities on the established market and the value of adoption costs, three scenarios are possible, namely introducing immediately, later or abstaining from product introduction. In case of delay of product introduction, the incumbent reduces capacities for the established product before the new product is introduced. We encounter Skiba points where the incumbent is indifferent between two of the three scenarios and use a bifurcation analysis in order to characterize the transition towards different steady states