A multi-stage optimal control approach of durable goods pricing and the launch of new product generations

Andrea Seidl*, Richard F. Hartl, Peter M. Kort

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We analyze the problem of a firm that sells durable goods. In particular, we investigate how this firm optimally combines continuous-time operational-level planning (continuously deciding on capacity investment) with discrete decision making (when to launch a new generation of the product, how to price a particular generation of the product).

We find that a firm should invest most into its production capacity just after the introduction of a new product. Then there is a large number of potential customers and thus a large production capacity is needed to fulfill demand. The extent to which existing capacity can still be used in the production process for the next generation has a non-monotonic effect on the optimal timing of launching a new generation as well as on its price. We show that the optimal price declines with each new product generation.



Original languageEnglish
Pages (from-to)207-220
JournalAutomatica
Volume106
DOIs
Publication statusPublished - Aug 2019

Keywords

  • Investment analysis
  • Durable goods
  • New product generations
  • Capacity investments
  • ADJUSTMENT COSTS
  • DIFFUSION
  • INVESTMENT
  • DECISIONS

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