When does a new product displace an old one?

Suppose someone has invented a new product that is better than one already in the market. Will people start buying the new product instead of the old one?

It depends on what is meant by better. If “better” means that whenever the new product has the same price as the old one it has a higher quality, or alternatively whenever it has the same quality as the old good it is cheaper, then it will displace the old good completely when purchases occur.

“Same quality” or “higher quality” are precise in their meaning here too. Same means identical in every way, while higher quality means better in every way. Quality includes consumer knowledge of the good, so that the two products are equally well known and trusted. For a new product, the level of consumer awareness may be lower than for the old product.

If the new product is not as good as or better than the old one in every way, then there will be some criteria other than price determining the choices of consumers in favour of the old product. The products are not perfect substitutes, so the old product and the new product will both be bought in the market with relative proportions depending on how many points the new product is better than the old one.

Mathematically inclined readers may find the model used in some economics papers informative. The choice between goods is modelled by a constant elasticity of substitution between the old and new goods, which is combined with Shephard’s lemma to calculate a demand for each type of good. The specification is helpful in connecting the demands for new goods domestically and internationally since the same type of choices drive both.