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Product innovation and imitation in a duopoly with differentiation by attributes

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  • Reynald-Alexandre Laurent

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

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    Abstract

    This paper considers a probabilistic duopoly in which products are described by their specific attributes, this form of differentiation embodying the horizontal and vertical dimensions. Consumers make discrete choices and follow a random decision rule based on these attributes. A three-stage game is studied in which firms develop new attributes for their products (innovation), then may imitate the attributes of the competing product and finally compete in price. At the equilibrium, the firm selling the less appreciated product is generally incited to imitate its rival. Confronted to a threat of imitation, the benchmark firm sometimes decreases strategically its attribute index in order to diminish its unit cost of innovation and the differentiation on the market, deterring the imitation in this way. This strategy is efficient when imitation costs are sufficiently concave. In the opposite case, it is preferable for the benchmark firm to accept the imitation. Thus, according to the shape of imitation costs, equilibria with "deterrence" or with "accommodation" "accommodation" occur, completing the current typology of strategic responses to a threat of imitation.

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    Bibliographic Info

    Paper provided by HAL in its series PSE Working Papers with number halshs-00586867.

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    Date of creation: Feb 2008
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    Handle: RePEc:hal:psewpa:halshs-00586867

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    Related research

    Keywords: quality choices ; differentiation by attributes ; product innovation; product imitation;

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    1. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-50, September.
    2. GARY-BOBO, Robert J., . "Cournot-Walras and locally consistent equilibria," CORE Discussion Papers RP -867, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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