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Product and Process Innovations in a Horizontally Differentiated Product Market

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  • Pia Weiss

    (Institute for Economic Policy)

Abstract

For a market of horizontal product differentiation, the paper examines the effects of the level of competition on the firm’s decision between a product and process innovation. When firms have to choose between the two types of innovation, it is demonstrated that both firms undertake the product innovation when the competi-tion is intense. For intermediate levels of competition, the firms choose different investment projects, and for less intense competition, the firms pursue cost–reducing innovations. When firms may undertake both innovations, they decide to undertake a mixture of the innovations depending on the innovation cost structure. Again, the firms are willing to incur higher costs into product innovations, when the competition is initially intense.

Suggested Citation

  • Pia Weiss, 2002. "Product and Process Innovations in a Horizontally Differentiated Product Market," Industrial Organization 0201005, EconWPA.
  • Handle: RePEc:wpa:wuwpio:0201005
    Note: Type of Document - Tex; prepared on IBM PC; pages: 16
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    References listed on IDEAS

    as
    1. Rosenkranz, Stephanie, 1995. "Innovation and cooperation under vertical product differentiation," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 1-22, March.
    2. 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.
    3. Martin Peitz, 1999. "A difficulty with the address models of product differentiation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 14(3), pages 717-727.
    4. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters,in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
    5. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    6. Greenstein, Shane & Ramey, Garey, 1998. "Market structure, innovation and vertical product differentiation," International Journal of Industrial Organization, Elsevier, vol. 16(3), pages 285-311, May.
    7. Cremer, Helmuth & Thisse, Jacques-Francois, 1991. "Location Models of Horizontal Differentiation: A Special Case of Vertical Differentiation Models," Journal of Industrial Economics, Wiley Blackwell, vol. 39(4), pages 383-390, June.
    8. Boone, Jan, 2001. "Intensity of competition and the incentive to innovate," International Journal of Industrial Organization, Elsevier, vol. 19(5), pages 705-726, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    product innovation; process innovation; horiyontal product differentiation;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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