A Firm's Innovation Decision When Consumers Can Wait for the Better Product

ABSTRACT This paper studies a monopolist's innovation decision and product pricing when selling a durable good to long‐lived consumers. In the two‐period model, a monopolist is concerned with whether to attempt a risky product innovation at the intermediate date. When consumers can wait for the better product, three equilibria exist, only one of which allows the firm to innovate. In two other equilibria, consumers either all run to buy early or all run to buy late, both preventing the firm from innovation. The result implies that innovation and welfare improvement can be at risk even in a market with rational players.