New Product Quality and Timing of Introduction under Competition

New productdevelopment under competition is modeled as a stochastic game. Duringthe product developmentphase, each firm'sproduct quality improves, and each firm must decide when to introduce its product. A better quality product commands a higher market share but takes a longer time during which the cometitor may introduce its product to capture a market share. In equilibrium, each firm is shown to set a minimum acceptable quality and introduces its productas soon as its product quality exceeds the threshold. The stronger firm is shown to introduce better quality product and command a higher market share.Competition among two equally strong firms is shown to be socially optimal.