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Innovation Under Spatial Duopoly

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  • Pu-Yan Nie

Abstract

Innovation is an important topic in economics. This paper highlights duopoly innovation under the Hotelling model with game theory approaches. This paper argues that market power, as measured by the cost advantage of a dominant firm over its rival, serves to enhance the incentive to innovate in a Hotelling model of spatial competition. This result implies that a firm with cost advantage will have a larger incentive than its rivals to further its cost advantage as new opportunities for innovation arise thereby implying that innovation increases concentration. This result is in contrast to the result obtained by Holmes et al. (2012) who use the Betrand model to show that "market power" lowers the incentive to innovate. We think that the inelastic demand causes this economic phenomenon.

Suggested Citation

  • Pu-Yan Nie, 2013. "Innovation Under Spatial Duopoly," Prague Economic Papers, Prague University of Economics and Business, vol. 2013(4), pages 474-486.
    • Handle: RePEc:prg:jnlpep:v:2013:y:2013:i:4:id:463:p:474-486
    DOI: 10.18267/j.pep.463
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    References listed on IDEAS

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    1. Oksana Loginova & X. Henry Wang, 2011. "Customization with Vertically Differentiated Products," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(2), pages 475-515, June.
    2. Jonathan Vogel, 2008. "Spatial Competition with Heterogeneous Firms," Journal of Political Economy, University of Chicago Press, vol. 116(3), pages 423-466, June.
    3. Larralde, Hernn & Stehl, Juliette & Jensen, Pablo, 2009. "Analytical solution of a multi-dimensional Hotelling model with quadratic transportation costs," Regional Science and Urban Economics, Elsevier, vol. 39(3), pages 343-349, May.
    4. Yi, Sang-Seung, 1999. "Market structure and incentives to innovate: the case of Cournot oligopoly," Economics Letters, Elsevier, vol. 65(3), pages 379-388, December.
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    8. Greenhut, M L & Ohta, H, 1972. "Monopoly Output Under Alternative Spatial Pricing Techniques," American Economic Review, American Economic Association, vol. 62(4), pages 705-713, September.
    9. Thomas J. Holmes & David K. Levine & James A. Schmitz, 2012. "Monopoly and the Incentive to Innovate When Adoption Involves Switchover Disruptions," American Economic Journal: Microeconomics, American Economic Association, vol. 4(3), pages 1-33, August.
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    Cited by:

    1. Hamid Hamoudi & Isabel Rodríguez & Marcos Sanz Martín-Bustamante, 2017. "Optimal Zoning in Spatial Differentiation," Estudios de Economia, University of Chile, Department of Economics, vol. 44(1 Year 20), pages 33-51, June.
    2. Pu‐yan Nie & Yong‐cong Yang, 2020. "Cost‐reduction innovation under mixed economy," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(7), pages 1195-1201, October.
    3. Chan Wang & Pu‐yan Nie, 2020. "Retail competition using free shopping shuttle bus strategies," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(6), pages 1010-1019, September.

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    More about this item

    Keywords

    game theory; innovation; spatial duopoly; case study;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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