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Process And Product Innovation In A Vertically Differentiated Industry

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  • EMANUELE BACCHIEGA

    ()
    (Department of Economics, University of Bologna, Piazza Scaravilli 2, 40126 Bologna, Italy)

  • LUCA LAMBERTINI

    ()
    (Department of Economics, University of Bologna, Strada Maggiore 45, 40125 Bologna, Italy)

  • ANDREA MANTOVAINI

    ()
    (Department of Economics, University of Bologna, Strada Maggiore 45, 40125 Bologna, Italy)

Abstract

We examine a vertically differentiated duopoly where firms invest in process and product innovation and then compete in prices under full market coverage. We show that (i) process innovation fosters (hinders) product innovation for the low-quality (high-quality) firm; (ii) the firm which is initially more efficient invests more than the rival in process innovation; (iii) if the initial differential between marginal costs is sufficiently high, the demand for the less efficient firm is nil and the duopoly equilibrium does not exist.

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Bibliographic Info

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Game Theory Review.

Volume (Year): 13 (2011)
Issue (Month): 02 ()
Pages: 209-221

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Handle: RePEc:wsi:igtrxx:v:13:y:2011:i:02:p:209-221

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Keywords: Vertical differentiation; quality; R&D; L13; O31;

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References

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  1. Lambertini, Luca & Orsini, Raimondello, 2000. "Process and product innovation in a vertically differentiated monopoly," Economics Letters, Elsevier, vol. 68(3), pages 333-337, September.
  2. van Dijk, Theon, 1996. "Patent Height and Competition in Product Improvements," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 151-67, June.
  3. Cohen, Wesley M & Klepper, Steven, 1996. "Firm Size and the Nature of Innovation within Industries: The Case of Process and Product R&D," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 232-43, May.
  4. Susan Athey & Armin Schmutzler, 1995. "Product and Process Flexibility in an Innovative Environment," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 557-574, Winter.
  5. Cremer, H. & Thisse, J.-F., . "Commodity taxation in a differentiated oligopoly," CORE Discussion Papers RP -1112, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. d'ASPREMONT, Claude & JACQUEMIN, Alexis, . "Cooperative and noncooperative R&D in duopoly with spillovers," CORE Discussion Papers RP -823, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Motta, M., 1991. "Cooperative R&D and vertical product differentiation," CORE Discussion Papers 1991028, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Rosenkranz, Stephanie, 1995. "Innovation and cooperation under vertical product differentiation," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 1-22, March.
  9. 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.
  10. Ulrich Lehmann-Grube, 1997. "Strategic Choice of Quality When Quality is Costly: The Persistence of the High-Quality Advantage," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 372-384, Summer.
  11. Motta, Massimo & Thisse, Jacques-Francois & Cabrales, Antonio, 1997. "On the Persistence of Leadership or Leapfrogging in International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(4), pages 809-24, November.
  12. Rosenkranz, Stephanie, 1997. "Quality improvements and the incentive to leapfrog," International Journal of Industrial Organization, Elsevier, vol. 15(2), pages 243-261, April.
  13. d'ASPREMONT, Claude & GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "On Hotelling's "Stability in competition"," CORE Discussion Papers RP -385, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  14. Prajit K. Dutta & Saul Lach & Aldo Rustichini, 1993. "Better Late Than Early: Vertical Differentiation in the Adoption of a New Technology," NBER Working Papers 4473, National Bureau of Economic Research, Inc.
  15. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
  16. Cremer, Helmuth & Thisse, Jacques-Francois, 1991. "Location Models of Horizontal Differentiation: A Special Case of Vertical Differentiation Models," Journal of Industrial Economics, Wiley Blackwell, vol. 39(4), pages 383-90, June.
  17. Jaskold Gabszewicz, J. & Thisse, J. -F., 1980. "Entry (and exit) in a differentiated industry," Journal of Economic Theory, Elsevier, vol. 22(2), pages 327-338, April.
  18. Lambertini, Luca, 1996. "Choosing Roles in a Duopoly for Endogenously Differentiated Products," Australian Economic Papers, Wiley Blackwell, vol. 35(67), pages 205-24, December.
  19. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
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Cited by:
  1. Andrea Mantovani, 2006. "Complementarity between product and process innovation in a monopoly setting," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 15(3), pages 219-234.

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