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

28 Pages Posted: 20 Jul 2010 Last revised: 23 Sep 2010

See all articles by Prajit K. Dutta

Prajit K. Dutta

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Saul Lach

Hebrew University of Jerusalem - Department of Economics; CEPR

Aldo Rustichini

University of Minnesota - Twin Cities - Department of Economics

Date Written: September 1993

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.

Suggested Citation

Dutta, Prajit K. and Lach, Saul and Rustichini, Aldo, Better Late than Early: Vertical Differentiation in the Adoption of a New Technology (September 1993). NBER Working Paper No. w4473. Available at SSRN: https://ssrn.com/abstract=1645725

Prajit K. Dutta (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

Saul Lach

Hebrew University of Jerusalem - Department of Economics ( email )

Mount Scopus
Jerusalem, 91905
Israel
+972 2 588 3253 (Phone)
+972 2 581 6071 (Fax)

HOME PAGE: http://economics.huji.ac.il/facultye/saul/saul.html

CEPR

London
United Kingdom

Aldo Rustichini

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

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