Simultaneous Choice of Process and Product Innovation

Stephanie Rosenkranz

No 1321, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper investigates the strategic decisions of two identical duopolists, who choose production technology as well as product differentiation through their R&D investment. The product market is characterized by heterogeneous Cournot competition. Firms have an incentive to invest in both process innovation and product innovation. The optimal division between these two kinds of R&D activities changes with market size. The higher consumers' willingness to pay, the more firms' investment is driven to product differentiation. If firms coordinate their R&D activities and share R&D costs, but remain rivals in the product market, they will reduce costs and differentiate their products more than under competition. The optimal proportion of R&D investment is driven more to product innovation than under R&D competition. It can be shown that welfare is increased if firms coordinate their research activities and share R&D costs. When firms cooperate, but do not share their R&D costs, welfare is only enhanced if product innovations are not too expensive.

Keywords: Market Size; Process Innovation; Product Innovation; R&D Cooperation (search for similar items in EconPapers)
JEL-codes: C72 L1 L13 O31 (search for similar items in EconPapers)
Date: 1996-01
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Citations: View citations in EconPapers (16)

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