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Innovation and Product Differentiation

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  • Prajit K. Dutta

Abstract

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.

Suggested Citation

  • Prajit K. Dutta, 1990. "Innovation and Product Differentiation," Discussion Papers 894, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:894
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    Cited by:

    1. Dutta, Prajit K & Lach, Saul & Rustichini, Aldo, 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, Winter.
    2. Jeng, Don Jyh-Fu & Huang, Kuo-Hsin, 2015. "Strategic project portfolio selection for national research institutes," Journal of Business Research, Elsevier, vol. 68(11), pages 2305-2311.
    3. Prajit K. Dutta & Aldo Rustichini, 1990. "(s,S) Equilibria in Stochastic Games with an Application to Product Innovations," Discussion Papers 916, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Bhattacharjya, Ashoke S., 1996. "Composition of R&D and technological cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 20(1-3), pages 445-470.
    5. Khanna, Tarun, 1995. "Racing behavior technological evolution in the high-end computer industry," Research Policy, Elsevier, vol. 24(6), pages 933-958, November.

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