Lien Zoom.

We consider a monopolistic firm that decides on the timing and production capacity for introducing a durable good into a market characterized by consumer heterogeneity and project value uncertainty. We show that when consumers are less heterogeneous, the firm should invest later, i.e. wait for product attractiveness to grow to a sufficiently high level, in a large production capacity. In case consumers are very heterogeneous, the firm should invest early in a small production capacity. In the latter case, selling the durable good in small quantities enables the firm to price discriminate over time, generating a high payoff. It follows that in an economic environment where it is optimal for the firm to invest early in a small capacity, i.e. when the trend and volatility of the project value is low, the firm’s payoff is higher when consumer preferences are more heterogeneous. On the other hand, in an economic environment where it is optimal for the firm to invest late in a large capacity, i.e. when the trend and volatility are high, the firm prefers more homogeneous consumer preferences. The fact that an increase in consumer heterogeneity may have a positive effect on the firm value distinguishes the durable goods case from market settings with non-durable products.

(with Herbert Dawid and Xingang Wen)