Racing to market leadership: Product launch and upgrade decisions

Firms might not launch a next generation product as soon as a more efficient technology or a better product design is ready. We use a stylized model to analyze firms' product launch and upgrade decisions in an incumbent-vs-entrant setting. We find that large profit margins from the next generation product alone do not provide the entrant sufficient incentives to launch the next generation product, although small profit margins will deter the entrant from joining the competition. If the entrant intends to enter the market at an earlier time, it should consider process improvements that lower the firm's launch costs of the current generation product. In addition, the incumbent must respond strategically to the entrant's arrival. In particular, when anticipating a late arrival of the entrant, the incumbent should upgrade to the next generation earlier. The incumbent also has a cost advantage in the race to launch the next generation product.