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Simultaneous Choice of Process and Product Innovation

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  • Rosenkranz, Stephanie

Abstract

This paper investigates the strategic decisions of two identical duopolists, who choose production technology as well as product differentiation through their R&D investment. The product market is characterized by heterogeneous Cournot competition. Firms have an incentive to invest in both process innovation and product innovation. The optimal division between these two kinds of R&D activities changes with market size. The higher consumers' willingness to pay, the more firms' investment is driven to product differentiation. If firms coordinate their R&D activities and share R&D costs, but remain rivals in the product market, they will reduce costs and differentiate their products more than under competition. The optimal proportion of R&D investment is driven more to product innovation than under R&D competition. It can be shown that welfare is increased if firms coordinate their research activities and share R&D costs. When firms cooperate, but do not share their R&D costs, welfare is only enhanced if product innovations are not too expensive.

Suggested Citation

  • Rosenkranz, Stephanie, 1996. "Simultaneous Choice of Process and Product Innovation," CEPR Discussion Papers 1321, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1321
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    Citations

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    Cited by:

    1. Massimo Motta, 2013. "Advertising bans," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 4(1), pages 61-81, March.
    2. Luca Lambertini, 2003. "The monopolist's optimal R&D portfolio," Oxford Economic Papers, Oxford University Press, vol. 55(4), pages 561-578, October.
    3. José M. Labeaga & Ester Martínez Ros, "undated". "Persistence and ability in the innovation decisions," Working Papers 2005-16, FEDEA.
    4. Lambertini, Luca & Orsini, Raimondello, 2000. "Process and product innovation in a vertically differentiated monopoly," Economics Letters, Elsevier, vol. 68(3), pages 333-337, September.
    5. Mikko Mustonen, 2005. "Signalling cost with investment in compatibility," Netnomics, Springer, vol. 7(1), pages 39-57, April.
    6. David Flacher & Jean-Hervé Lorenzi & Alain Villemeur, 2005. "Innovation, nature of investment and divergent growth paths: an explanatory model," Working Papers halshs-00132238, HAL.
    7. Bonanno, Giacomo & Haworth, Barry, 1998. "Intensity of competition and the choice between product and process innovation," International Journal of Industrial Organization, Elsevier, vol. 16(4), pages 495-510, July.
    8. Karl Morasch & Martin Bandulet, 2011. "Sharing the Market or Getting Closer for a Fight? Strategic Reaction to Reduced Trade Costs," Open Economies Review, Springer, vol. 22(4), pages 709-737, September.
    9. Pia Weiss, 2002. "Adoption of Product and Process Innovations in Differentiated," Industrial Organization 0212002, EconWPA.
    10. Lin, Ping & Saggi, Kamal, 2002. "Product differentiation, process R&D, and the nature of market competition," European Economic Review, Elsevier, vol. 46(1), pages 201-211, January.
    11. Albach, Horst & Audretsch, David B. & Fleischer, Manfred & Greb, Robert & Höfs, Evelyn & Röller, Lars-Hendrik & Schulz, Ines, 1996. "Innovation in the European chemical industry," Discussion Papers, various Research Units FS IV 96-26, Social Science Research Center Berlin (WZB).

    More about this item

    Keywords

    Market Size; Process Innovation; Product Innovation; R&D Cooperation;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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