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Better Late Than Early: Vertical Differentiation in the Adoption of a New Technology

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Author Info
Dutta, Prajit K
Lach, Saul
Rustichini, Aldo

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Abstract

After the initial breakthrough in the research phase of R&D, a new product undergoes a process of change, improvement, and adaptation to market conditions. We model the strategic behavior of firms in this development phase. We emphasize that a key dimension to this competition is the innovation that leads to product differentiation and quality improvement. In a duopoly model with a single adoption choice, we derive endogenously the level and diversity of product innovations. We demonstrate the existence of equilibria in which one firm enters early with a low-quality product while the other continues to develop the technology and eventually markets a high-quality good. In such an equilibrium no monopoly rent is dissipated and the later innovator makes more profits. Incumbent firms may well be the early innovators, contrary to the predictions of the "incumbency inertia" hypothesis. Copyright 1995 by MIT Press.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Economics & Management Strategy.

Volume (Year): 4 (1995)
Issue (Month): 4 (Winter)
Pages: 563-89
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Handle: RePEc:bla:jemstr:v:4:y:1995:i:4:p:563-89

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc. [Downloadable!]
  2. Grossman, Gene M & Helpman, Elhanan, 1991. "Quality Ladders and Product Cycles," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 557-86, May. [Downloadable!] (restricted)
    Other versions:
  3. Reinganum, Jennifer F, 1981. "On the Diffusion of New Technology: A Game Theoretic Approach," Review of Economic Studies, Blackwell Publishing, vol. 48(3), pages 395-405, July. [Downloadable!] (restricted)
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  4. Katz, Michael L & Shapiro, Carl, 1987. "R&D Rivalry with Licensing or Imitation," American Economic Review, American Economic Association, vol. 77(3), pages 402-20, June. [Downloadable!] (restricted)
  5. Reinganum, Jennifer F, 1983. "Uncertain Innovation and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 73(4), pages 741-48, September. [Downloadable!] (restricted)
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  6. Herman C. Quirmbach, 1986. "The Diffusion of New Technology and the Market for an Innovation," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 33-47, Spring. [Downloadable!] (restricted)
  7. Segerstrom, Paul S & Anant, T C A & Dinopoulos, Elias, 1990. "A Schumpeterian Model of the Product Life Cycle," American Economic Review, American Economic Association, vol. 80(5), pages 1077-91, December. [Downloadable!] (restricted)
  8. Curtis Eaton, B. & Lipsey, Richard G., 1989. "Product differentiation," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 12, pages 723-768 Elsevier. [Downloadable!] (restricted)
  9. Fudenberg, Drew & Tirole, Jean, 1985. "Preemption and Rent Equilization in the Adoption of New Technology," Review of Economic Studies, Blackwell Publishing, vol. 52(3), pages 383-401, July. [Downloadable!] (restricted)
  10. Dutta, P.K. & Lach, S. & Rustichini, A., 1990. "Innovation And Product Differentiation," Discussion Papers 1990_06, Columbia University, Department of Economics.
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  11. Dutta, Prajit K & Rustichini, Aldo, 1993. "A Theory of Stopping Time Games with Applications to Product Innovations and Asset Sales," Economic Theory, Springer, vol. 3(4), pages 743-63, October.
  12. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," NBER Working Papers 3099, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Prajit K. Dutta, 1990. "Innovation and Product Differentiation," Discussion Papers 894, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  14. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Blackwell Publishing, vol. 49(1), pages 3-13, January. [Downloadable!] (restricted)
  15. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-26, June. [Downloadable!] (restricted)
  16. Edward C. Prescott & Michael Visscher, 1977. "Sequential Location among Firms with Foresight," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 378-393, Autumn. [Downloadable!] (restricted)
  17. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers 8904, University of Western Ontario, Department of Economics.
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  18. repec:fth:coluec:484 is not listed on IDEAS
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ruslan Lukach & Peter M. Kort & Joseph Plasmans, 2007. "Strategic R&D with Knowledge Spillovers and Endogenous Time to Complete," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  2. Cellini, Roberto & Lambertini, Luca & Sterlacchini, Alessandro, 2009. "Managerial incentive and the firms’ propensity to invest in product and process innovation," MPRA Paper 12935, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. Gianluca Femminis & Gianmaria Martini, 2009. "First mover advantage in a dynamic duopoly with spillover," DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi itemq0955, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE). [Downloadable!]
  4. E. Bacchiega & L. Lambertini & A. Mantovani, 2007. "Process and product innovation in a vertically differentiated industry," Working Papers 583, Dipartimento Scienze Economiche, Universita' di Bologna. [Downloadable!]
  5. L. Colombo & L. Lambertini, 2002. "Dynamic Advertising under Vertical Product Differentiation," Working Papers 456, Dipartimento Scienze Economiche, Universita' di Bologna. [Downloadable!]
  6. L. Colombo & L. Lambertini, 2003. "Quality and Advertising in a Dynamic Duopoly," Working Papers 490, Dipartimento Scienze Economiche, Universita' di Bologna. [Downloadable!]
  7. L. Lambertini & P. Tedeschi, 2000. "On the Social Desirability of Patents for Sequential Innovations in a Vertically Differentiated Market," Working Papers 376, Dipartimento Scienze Economiche, Universita' di Bologna. [Downloadable!]
    Other versions:
  8. Chrysovalantou Milliou & Emmanuel Petrakis, 2009. "Timing of Technology Adoption and Product Market Competition," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  9. Donald S. Siegel & Donald F. Vitaliano, 2006. "An Empirical Analysis of the Strategic Use of Corporate Social Responsibility," Rensselaer Working Papers in Economics 0602, Rensselaer Polytechnic Institute, Department of Economics. [Downloadable!]
    Other versions:
  10. Huisman, K.J.M. & Kort, P.M., 1999. "Effects of strategic interactions on the option value of waiting," Discussion Paper 92, Tilburg University, Center for Economic Research. [Downloadable!]
  11. Francisco Ruiz-Aliseda, 2003. "Strategic Commitment Versus Flexibility in a Duopoly with Entry and Exit," Discussion Papers 1379, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  12. Donald Siegel, 2009. "Green Management Matters Only If It Yields More Green: An Economic/Strategic Perspective," Working Papers 8, Jerusalem Institute for Market Studies (JIMS). [Downloadable!]
  13. Tobias Kretschmer & Katrin Muehlfeld, 2006. "Co-Opetition and Prelaunch in Standard-Setting for Developing Technologies," CEP Discussion Papers dp0742, Centre for Economic Performance, LSE. [Downloadable!]
  14. L. Lambertini & P. Tedeschi, 2003. "Would you like to enter first with a low-quality good?," Working Papers 494, Dipartimento Scienze Economiche, Universita' di Bologna. [Downloadable!]
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  15. Huisman, K.J.M. & Kort, P.M., 1998. "A further analysis on strategic timing of adoption of new technologies under uncertainty," Discussion Paper 3, Tilburg University, Center for Economic Research. [Downloadable!]
  16. L. Lambertini & P. Tedeschi, 2003. "Sequential Entry in a Vertically Differentiated Duopoly," Working Papers 492, Dipartimento Scienze Economiche, Universita' di Bologna. [Downloadable!]
  17. Huisman, K.J.M. & Kort, P.M., 1998. "Strategic investment in technological innovations," Discussion Paper 114, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
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