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Competing incremental and breakthrough innovation in a model of product evolution

Colin Davis and Yasunobu Tomoda ()
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Yasunobu Tomoda: Kobe City University of Foreign Studies

Journal of Economics, 2018, vol. 123, issue 3, 225-247

Abstract: Abstract This paper develops a growth model in which product cycles arise endogenously from investment in incremental and breakthrough innovations. Incumbent firms invest in incremental technology improvements with the aim of reducing production costs. Market entrants develop breakthrough product designs in order to capture the market from vintage product lines. The competing objectives of the two types of innovation generate product cycles within an environment of creative destruction, as new products displace old and are then manufactured using production technologies that are continuously refined. Investigating the relationship between innovation incentives and the average length of product cycles, we characterized three stable patterns of product evolution: incremental innovation alone, breakthrough innovation alone, and product cycles with both types of innovation. Numerical examples suggest that when the market exhibits stable product cycles, subsidies to either type of innovation raise the rate of economic growth and improve welfare.

Keywords: Incremental innovation; Breakthrough innovation; Product evolution; Product cycles; Endogenous economic growth (search for similar items in EconPapers)
Date: 2018
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