New Product Introductions with Selection of Unique and Common Features in Monopoly Markets

Firms have to determine the right features and price for their new products as they introduce new product generations to the market. We consider the problem of determining the features of a new product that will be introduced by a monopolist into a market that contains an existing product as well as setting the prices of the existing and the new products. The firm also decides on offering only the new product or both the existing and the new products. We explicitly capture the effects of unique features, which are specific to one of the two products, and common features which are shared between the new and the existing product on these decisions. The problem is formulated as a nonlinear-mixed-integer program for the case with the general cost, demand and price functions. For the linear case, the optimal prices for both products and the optimal unique features for the new product are derived in closed form, a linear-time algorithm is presented to determine the optimal common features, and the optimality conditions of keeping the existing product in the market is characterized. We show that the selection of the unique features, but not the common ones, is based on the difference between a feature’s contribution to the product’s demand and its cost adjusted by the price sensitivity in the linear case. Moreover, we find that the firm, if it wants to avoid demand cannibalization, should remove the existing product from the market rather than offer two products with mainly unique features