Product Innovation with Vertical Differentiation: Is a Monopolist's Incentive Weaker?

Serge Moresi () and Marius Schwartz
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Serge Moresi: Charles River Associates, Inc., https://www.crai.com/our-people/serge-moresi/

Working Papers from Georgetown University, Department of Economics

Abstract: Extant literature shows that Arrow’s famous result—a secure monopolist gains less from a nondrastic process innovation than would a competitive firm—does not always extend to nondrastic product innovations. If the new product is horizontally differentiated, the monopolist can have a greater incentive to add the new product than a firm that would face competition from the old product; but the monopolist’s incentive to add the new product cannot be greater if the new product is vertically differentiated with higher quality than the old. This paper compares the incentives when the new product is vertically differentiated but of lower quality, a common case empirically. We show that, as with horizontal differentiation, the monopolist can have the greatest incentive to add the new product. However, in all the cases analyzed, consumer welfare (though not total welfare) is lower under monopoly, even when only the monopolist would add the new product. Our analysis also helps clarify why the ranking of incentives depends on the type of product differentiation and on whether the market is covered or not.

Keywords: Product Innovation Incentives; Vertical Differentiation; Monopoly vs. Competition (search for similar items in EconPapers)
JEL-codes: L1 L4 (search for similar items in EconPapers)
Pages: 26
Date: 2023-01-22
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Product innovation with vertical differentiation: Is a monopolist's incentive weaker? (2023)
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