Final answer:
In the introduction phase of a product lifecycle, development costs build up and are not typically offset by revenue, leading to net losses. Companies invest in the product, hoping to recover these costs as the product gains market acceptance and moves to the growth phase, where economies of scale may occur.The cost will typically build up.
Step-by-step explanation:
During the introduction phase of a product lifecycle, development costs typically build up. This is because at this stage, the product has just been launched and sales volume is usually low, not enough to cover the initial high costs associated with product development, marketing, and distribution. As demand has not yet peaked, revenues at this phase are typically insufficient to offset the accumulated costs.
It's common for businesses to experience net losses during this period until the product gains market acceptance and moves into the growth phase, where economies of scale may begin to reduce unit costs and increase profitability.
In a perfectly competitive market, this scenario might differ as firms adjust to industry changes. In a decreasing cost industry, for example, the expansion of the market could result in lower production costs for both old and new firms. However, during the introduction phase specifically, companies generally invest heavily without immediate return, anticipating that these costs will be recovered as the product gains acceptance and reaches economies of scale.