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B etter L ate than E arly : V ertical D ifferentiation in the A doption of a N ew T echnology
Author(s) -
Dutta Prajit K.,
Lach Saul,
Rustichini Aldo
Publication year - 1995
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.1995.00563.x
Subject(s) - duopoly , competition (biology) , monopoly , quality (philosophy) , product (mathematics) , microeconomics , economics , industrial organization , cournot competition , mathematics , physics , ecology , geometry , biology , quantum mechanics
After the initial breakthrough in the research phase of R&D, a new product undergoes a process of change, improvement, and adaptation to market conditions. We model the strategic behavior of firms in this development phase. We emphasize that a key dimension to this competition is the innovation that leads 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 one firm enters early with a low‐quality product while the other continues to develop the technology and eventually markets a high‐quality good. In such an equilibrium, no monopoly rent is dissipated and the later innovator makes more profits. Incumbent firms may well be the early innovators, contrary to the predictions of the “incumbency inertia” hypothesis.