Riding successive product diffusion waves. Building a tsunami via upgrade-rebate programs

This paper considers upgrade-rebate strategy in a dynamic context. We analyze how firms can control the transition process across multi-generational innovation diffusion waves through upgrade-rebates. By using rebates, firms can recover former customers who can substitute an old-generation product with a new generation and, at the same time, accelerate the diffusion of new generations. We study optimal rebate amounts and prices which maximize firm's discounted profits. We show that the implementation of a rebate program decreases the prices of the old generation, but increases the prices of the new generation. We also find that for certain market conditions it is optimal to provide higher rebate amount than the price of the second generation at the start of the upgrade-rebate program.