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

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  • Prajit K. Dutta
  • Saul Lach
  • Aldo Rustichini

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.

Suggested Citation

  • Prajit K. Dutta & Saul Lach & Aldo Rustichini, 1995. "Better Late than Early: Vertical Differentiation in the Adoption of a New Technology," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(4), pages 563-589, December.
    • Handle: RePEc:bla:jemstr:v:4:y:1995:i:4:p:563-589
    DOI: 10.1111/j.1430-9134.1995.00563.x
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    More about this item

    JEL classification:

    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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