The effects of learning-by-doing on product innovation by a durable good monopolist

We analyze a durable good monopolist's decision to adopt a new and more efficient technology that is readily available at very low or zero adoption cost. After an initial period of learning-by-doing, the new technology makes the good more attractive to consumers. Anticipating a better product, consumers delay their current purchases which lowers today's profits, but increases future profits since the monopolist can charge a higher price for the high-quality good. We show that the effect on overall profit depends on variables such as the degree of innovation. For certain parameter values, the monopolist adopts the innovation even when it is not first best to do so. We also provide conditions under which the monopolist finds it optimal to continue using the inferior production technology even if the innovation is freely available. The latter result provides a possible rationale for a firm to hold on to a "sleeping patent" when its use is socially desirable. (c) 2004 Elsevier B.V. All rights reserved.