Innovation and Product Differentiation
Economic theory has primarily viewed an innovation as a single, discontinuous change. Historical and empirical evidence, on the other hand, shows improvements to original technologies and quality additions to early products. We focus analysis on competition in post-discovery phase, emphasizing in particular that a key dimension to this competition is the innovations that lead 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 firms emerge at different points of the quality spectrum. In such equilibria, no monopoly rent is dissipated and later innovators make more profits. Incumbent firms may well be the early innovators, contrary to the predictions of diversity, learning and market lock-in, in determining market expectations and hence the innovation outcomes is analyzed. Finally, innovative incentives under a cartel and social planner are contrasted with the duopoly outcomes.
|Date of creation:||Mar 1990|
|Date of revision:|
|Contact details of provider:|| Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014|
Web page: http://www.kellogg.northwestern.edu/research/math/
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- Tom Lee & Louis L. Wilde, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, Oxford University Press, vol. 94(2), pages 429-436.
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- Kohlberg, Elon & Mertens, Jean-Francois, 1986.
"On the Strategic Stability of Equilibria,"
Econometric Society, vol. 54(5), pages 1003-37, September.
- KOHLBERG, Elon & MERTENS, Jean-François, . "On the strategic stability of equilibria," CORE Discussion Papers RP 716, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- E. Kohlberg & J.-F. Mertens, 1998. "On the Strategic Stability of Equilibria," Levine's Working Paper Archive 445, David K. Levine.
- Christopher Harris & John Vickers, 1985. "Perfect Equilibrium in a Model of a Race," Review of Economic Studies, Oxford University Press, vol. 52(2), pages 193-209.
- Fudenberg, Drew & Gilbert, Richard & Stiglitz, Joseph & Tirole, Jean, 1983. "Preemption, leapfrogging and competition in patent races," European Economic Review, Elsevier, vol. 22(1), pages 3-31, June.
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