Working Paper: NBER ID: w4473
Authors: Prajit K. Dutta; Saul Lach; Aldo Rustichini
Abstract: 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 of R&D. We emphasize that a key dimension to this competition is the innovations that lead to product differentiation and quality improvement. In a duopoly model with a single adoption choice, we derive endogeneously 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 hypothesis.
Keywords: innovation; technology adoption; duopoly; product differentiation
JEL Codes: D43; L12; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| waiting (Y70) | timing of innovation (O35) |
| current profits (D33) | likelihood of adopting new technology (O33) |
| maturation equilibrium (D50) | higher profits for later innovator (O36) |
| staggered innovations (O35) | technology improvement by waiting (O39) |