When should a firm introduce a line extension or improved product in order to maximize total profits from the original product and the line extension? We identify three critical issues which affect the answer to this question: the interrelationship of sales of the two products because of substitution and diffusion, the relative margins of the two products, and the relationship of the length of the firm's planning horizon to the original product's diffusion time. We develop a model in which the first product contributes a higher unit margin; however, sales develop slowly. The line extension contributes a lower unit margin and partially cannibalizes sales of the original product, but also broadens the market, causing sales to develop more rapidly. The timing of the introduction of the line extension affects the subsequent sales pattern for both products and the total profit to be made within the planning period. The optimal entry time depends upon the product pair's substitutability. We show that it is best either to introduce the line extension at a time early in the life cycle of the original product or not to introduce it at all. Consideration of dynamic phenomena can make a difference. For example, our results indicate that in some cases the line extension should be introduced early, whereas a simpler static analysis (which neglects diffusion and the implications of a finite planning horizon) would indicate that the line extension should never be introduced.
