Process and Product Innovation in a Vertically Differentiated Industry

University of Bologna Economics, Quaderni-Working Paper DSE No. 583

18 Pages Posted: 17 Sep 2007 Last revised: 3 Sep 2013

See all articles by Emanuele Bacchiega

Emanuele Bacchiega

University of Bologna - Department of Economics

Luca Lambertini

University of Bologna - Department of Economics

Andrea Mantovani

Catholic University of Louvain

Date Written: February 2007

Abstract

We examine a vertically differentiated duopoly where firms invest in process and product innovation and then compete in prices under full market coverage. We show that (i) process and product innovation are complements (substitutes) for the low-quality (high-quality) firm; (ii) the firm which is initially more efficient invests more than the rival in process innovation; (iii) if the initial differential between marginal costs is sufficiently high, the demand for the less efficient firm is nil and the duopoly equilibrium does not exist. Finally, we investigate the feasibility of R&D cooperation for process innovation.

Keywords: Vertical Differentiation, Quality, R&D

Suggested Citation

Bacchiega, Emanuele and Lambertini, Luca and Mantovani, Andrea, Process and Product Innovation in a Vertically Differentiated Industry (February 2007). Available at SSRN: https://ssrn.com/abstract=1014397 or http://dx.doi.org/10.2139/ssrn.1014397

Emanuele Bacchiega (Contact Author)

University of Bologna - Department of Economics ( email )

Piazza Scaravilli 2
40126 Bologna, 40125
Italy
+390512098486 (Phone)
+390512098493 (Fax)

Luca Lambertini

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy
+39 051 2092600 (Phone)
+39 051 2092664 (Fax)

Andrea Mantovani

Catholic University of Louvain ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

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