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Process and product innovation: A differential game approach to product life cycle
Author(s) -
Lambertini Luca,
Mantovani Andrea
Publication year - 2010
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/j.1742-7363.2010.00132.x
Subject(s) - cournot competition , incentive , economics , microeconomics , competition (biology) , differential game , investment (military) , product (mathematics) , product innovation , product differentiation , differential (mechanical device) , bertrand competition , marginal cost , industrial organization , oligopoly , mathematics , ecology , mathematical optimization , geometry , engineering , politics , political science , law , biology , aerospace engineering
We investigate the timing of adoption of product and process innovation using a differential game where firms may invest in both activities. We consider horizontal product innovation that reduces product substitutability, and process innovation that reduces marginal cost. First, we demonstrate that the incentive for cost‐reducing investment is relatively higher than the incentive to increase product differentiation. Second, depending on initial conditions: (i) firms activate both types of investment from the very outset to the steady state; (ii) firms initially invest in only one R&D activity and then reach the steady state either carrying out only this activity or carrying out both; or (iii) firms do not invest at all in either type of innovation. Comparing R&D investments under Cournot and Bertrand behavior shows that quantity competition entails lower R&D incentives than price competition in both directions.