Product Innovation Incentives: Monopoly vs. Competition

Yongmin Chen and Marius Schwartz

Journal of Economics & Management Strategy, 2013, vol. 22, issue 3, 513-528

Abstract: In contrast to Arrow's result for process innovations, we show that the gain from a product innovation can be larger to a secure monopolist than to a rivalrous firm that would face competition from independent sellers of the old product. A monopolist incurs profit diversion from its old good but may gain more than a rivalrous firm on the new good by coordinating the prices. In a Hotelling framework, we find simple conditions for the monopolist's gain to be larger. We also explain why the ranking of innovation incentives differs under vertical product differentiation.

Date: 2013
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https://doi.org/10.1111/jems.12026

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Working Paper: Product Innovation Incentives: Monopoly vs. Competition (2009)
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