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In this article, we investigate how Shanzhai phenomenon affects the competition among firms adopted different innovation mode, namely incubative innovation, acquisitive innovation and Shanzhai. Using the framework of vertical product differentiation model, we first analyze the duopoly game between incubative innovation and acquisitive innovation, then introduce Shanzhai innovation to the model, and compare the equilibrium result between the two games. We show that the rise of Shanzhai innovation has the opposite effect on the innovation incentive of incubative innovator and acquisitive innovator. The rise of Shanzhai innovation also decreases the prices and profits of incubative innovator and acquisitive innovator, decreases producer surplus and social welfare, while increases consumer surplus. Moreover, if the efficiency parameter of Shanzhai innovation is sufficiently small, firms adopted Shanzhai innovation might earn higher profits than the ones adopted acquisitive innovation and incubative innovation.

On the Competition among Three Modes of Innovation: Incubative Innovation, Acquisitive Innovation and Shanzhai