Better Late Than Early: Vertical Differentiation in the Adoption of a New Technology

Prajit K. Dutta, Saul Lach and Aldo Rustichini

No 4473, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: After the initial breakthrough in the research phase of R&D a new product undergoes a process of change, improvement and adaptation to market conditions. We model the strategic behavior of firms in this development phase of R&D. We emphasize that a key dimension to this competition is the innovations that lead to product differentiation and quality improvement. In a duopoly model with a single adoption choice, we derive endogeneously the level and diversity of product innovations. We demonstrate the existence of equilibria in which one firm enters early with a low quality product while the other continues to develop the technology and eventually markets a high quality good. In such an equilibrium, no monopoly rent is dissipated and the later innovator makes more profits. Incumbent firms may well be the early innovators, contrary to the predictions of the hypothesis.

JEL-codes: L15 O3 (search for similar items in EconPapers)
Date: 1993-09
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Citations: View citations in EconPapers (2)

Published as Journal of Economics and Management Strategy, vol. 4, no. 4, Winter 1995, pp.563-589.

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Journal Article: Better Late than Early: Vertical Differentiation in the Adoption of a New Technology (1995)
Journal Article: Better Late Than Early: Vertical Differentiation in the Adoption of a New Technology (1995)
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