Profits From Product Innovation

Consider a market with product differentiation, as this. An R&D investment over the years leads to an improvement of one product features and the management decides to substitute this new model to the existing one. Let's imagine for simplicity's sake that costs of product are the same as the previous version.

Three main effects will increase sales:

1. consumers who did not buy the good because it did not satisfied their minimum requirements on this feature can now buy, to the extend the improvement is sufficient at their eyes;

2. consumers who decides by a "top-quality" rule and positively value the feature could switch from their current provider, to the extend the overall quality of the new good becomes superior;

3. consumers who decides by a "value-for-money" rule could switch from their current provider, to the extend the price / quality relationships of the new good becomes more convenient.

At the same time, the price of this new version could be set higher than before, so that sales would be braken, unit profits boosted. Overall profits would soar.

Try all this - and the consequences of competitors' reaction - by playing this business game.