Durable Goods Monopoly, Learning-by-doing and "Sleeping Patents"

We analyze a durable good monopolist's decision to adopt a new and more efficient technology that is readily available at no cost. After an initial period of learning by doing, the new technology can either lower the cost of production, or make the good more attractive to consumers. We show that for certain parameter values, the monopolist finds it optimal to continue using the inferior production technology. An implication for welfare purposes is that a durable good monopolist may hold onto a "sleeping patent" when its use is socially desirable. However, we also show that sometimes the monopolist innovates too much relative to the socially optimal level.