Product and Process Innovations in a Horizontally Differentiated
Product Market
For horizontal product differentiation, the paper examines the effects of the level of
competition on the firm's decision between a product and process innovation. When firms
have to choose between the two types of innovation, it is demonstrated that both firms
undertake the product innovation when the competition is intense, they choose different
investment projects in intermediate competition, and they pursue cost--reducing
innovations when competition is less intense. If firms may pursue both innovations, they
mix the types depending on the innovation cost structure. Again, firms incur higher costs
into product innovations, when the competition is initially intense.
JEL-Classification: L13
Keywords: Product innovation; Process innovation; Horizontal product differentiation
Download paper: dp07_01.pdf [90kb]
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