Product innovation with partial capacity rollover

Herbert Dawid (), Michael Kopel and Peter Kort
Additional contact information
Herbert Dawid: Bielefeld University

Central European Journal of Operations Research, 2020, vol. 28, issue 2, No 7, 479-496

Abstract: Abstract This paper analyzes how the transferability of production capacities from an established to a new product influences the incentives of a firm to invest in R&D. A dynamic duopoly model is considered, where initially both firms offer a homogeneous product. The firms invest in production capacities and simultaneously in R&D which determines their innovation rate. The firm that innovates first extends its product line and obtains a patent for the new product that prevents the other firm from catching up. Upon the launch of the new product, the innovator then has the option to transfer part of the capacity for the established product to the production process of the new product. If capacities can be rolled over to the new product, a trade-off can be detected in that this rollover option gives the larger firm more incentive to innovate, whereas the cannibalization effect gives the smaller firm a higher innovation incentive. As a logical consequence we find that the larger firm is expected to innovate first when the capacity transfer does not involve a too high capacity loss. However, if the losses of capacity transfer are considerable, the cannibalization effect starts to dominate and the smaller firm’s incentive to innovate is larger.

Keywords: Dynamic duopoly; Product innovation; Capital accumulation; Differential games; Markov perfect equilibrium; Capacity rollover (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://link.springer.com/10.1007/s10100-019-00648-7 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:cejnor:v:28:y:2020:i:2:d:10.1007_s10100-019-00648-7

Ordering information: This journal article can be ordered from
http://www.springer. ... search/journal/10100

DOI: 10.1007/s10100-019-00648-7

Access Statistics for this article

Central European Journal of Operations Research is currently edited by Ulrike Leopold-Wildburger

More articles in Central European Journal of Operations Research from Springer, Slovak Society for Operations Research, Hungarian Operational Research Society, Czech Society for Operations Research, Österr. Gesellschaft für Operations Research (ÖGOR), Slovenian Society Informatika - Section for Operational Research, Croatian Operational Research Society
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().