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Product and Process Innovations in a Horizontally Differentiated Product Market

  • Pia Weiss

    (Institute for Economic Policy)

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.

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File URL: http://econwpa.repec.org/eps/io/papers/0201/0201005.pdf
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Paper provided by EconWPA in its series Industrial Organization with number 0201005.

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Length: 16 pages
Date of creation: 08 Jan 2002
Date of revision:
Handle: RePEc:wpa:wuwpio:0201005
Note: Type of Document - Tex; prepared on IBM PC; pages: 16
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Martin Peitz, 1998. "- A Difficulty With The Address Models Of Product Differentiation," Working Papers. Serie AD 1998-21, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  2. 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.
  3. CREMER, Helmuth & THISSE, Jacques-François, . "Location models of horizontal differentiation: a special case of vertical differentiation models," CORE Discussion Papers RP -931, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. 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.
  5. 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.
  6. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  7. Rosenkranz, Stephanie, 1995. "Innovation and cooperation under vertical product differentiation," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 1-22, March.
  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.
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