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Dynamic strategic interaction between an innovating and a non-innovating incumbent

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  • H. Dawid
  • M. Kopel
  • P. Kort

Abstract

This paper analyzes the effects of product innovation on the firms’ investment behavior in a dynamic duopoly framework. A differential game setting is considered where initially two firms are active on a homogeneous product market. One of the firms has an option to introduce a new product that is horizontally and vertically differentiated from the established product. The resulting differential game has three states corresponding to three capital stocks: one for each firm to produce the established product, and one for the innovating firm to produce the new product. We numerically derive Markov perfect equilibria. One of the most remarkable results is that in most cases the non-innovating firm benefits when the other firm carries out the innovation option. The intuition is that, to increase demand for the innovative product, the innovative firm reduces capacity on the established market, which increases the price of the established product and thus the payoff of the non-innovating firm. Copyright Springer-Verlag 2010

Suggested Citation

  • H. Dawid & M. Kopel & P. Kort, 2010. "Dynamic strategic interaction between an innovating and a non-innovating incumbent," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 18(4), pages 453-463, December.
    • Handle: RePEc:spr:cejnor:v:18:y:2010:i:4:p:453-463
    DOI: 10.1007/s10100-010-0173-4
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    References listed on IDEAS

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    1. Feichtinger, Gustav & Jorgensen, Steffen, 1983. "Differential game models in management science," European Journal of Operational Research, Elsevier, vol. 14(2), pages 137-155, October.
    2. Dockner, Engelbert J, 1992. "A Dynamic Theory of Conjectural Variations," Journal of Industrial Economics, Wiley Blackwell, vol. 40(4), pages 377-395, December.
    3. Lambertini, Luca & Mantovani, Andrea, 2009. "Process and product innovation by a multiproduct monopolist: A dynamic approach," International Journal of Industrial Organization, Elsevier, vol. 27(4), pages 508-518, July.
    4. M. Breton & A. Turki & G. Zaccour, 2004. "Dynamic Model of R&D, Spillovers, and Efficiency of Bertrand and Cournot Equilibria," Journal of Optimization Theory and Applications, Springer, vol. 123(1), pages 1-25, October.
    5. Dockner, Engelbert J & Feichtinger, Gustav & Mehlmann, Alexander, 1993. "Dynamic R&D Competition with Memory," Journal of Evolutionary Economics, Springer, vol. 3(2), pages 145-152, May.
    6. Patrizio Bianchi & Luca Lambertini (ed.), 2003. "Technology, Information And Market Dynamics," Books, Edward Elgar Publishing, number 2781.
    7. Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329.
    8. Jun, Byoung & Vives, Xavier, 2004. "Strategic incentives in dynamic duopoly," Journal of Economic Theory, Elsevier, vol. 116(2), pages 249-281, June.
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    1. Dawid, H. & Kopel, M. & Kort, P.M., 2013. "R&D competition versus R&D cooperation in oligopolistic markets with evolving structure," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 527-537.
    2. Dawid, Herbert & Kopel, Michael & Kort, Peter M., 2013. "New product introduction and capacity investment by incumbents: Effects of size on strategy," European Journal of Operational Research, Elsevier, vol. 230(1), pages 133-142.
    3. Herbert Dawid & Michel Y. Keoula & Peter M. Kort, 2017. "Numerical Analysis of Markov-Perfect Equilibria with Multiple Stable Steady States: A Duopoly Application with Innovative Firms," Dynamic Games and Applications, Springer, vol. 7(4), pages 555-577, December.
    4. Richard Hartl & Ulrike Leopold-Wildburger & Marion Rauner & Gerhard Sorger & Gernot Tragler & Vladimir Veliov, 2010. "Editorial “In honor of Gustav Feichtinger”," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 18(4), pages 433-435, December.
    5. Herbert Dawid & Michael Kopel & Peter M. Kort, 2020. "Product innovation with partial capacity rollover," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 28(2), pages 479-496, June.

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