15 Pages Posted: 15 Aug 2012
Date Written: August 15, 2012
We investigate what kind of competitive pressure induces existing firms to engage in more intensive innovation activities. We examine two types of competitive pressure: a price decrease in competitive fringe firms and a quality improvement therein. We use an oligopoly model with vertical differentiation to investigate this question. We show that a decrease in the exogenous price of competitive firms induces the two existent leading firms (one high-quality firm and one mid-quality firm) to engage in quality investments more if the ex ante quality level of the high quality product is large enough; otherwise, only the mid-quality firm engages more in quality investment. We also show that an increase in the exogenous quality level of competitive firms diminishes the incentive of the mid-quality firm to engage in quality investments.
Keywords: fringe firms, competitive pressure, investments, vertical differentiation
JEL Classification: L13, O31, D43
Suggested Citation: Suggested Citation
Matsushima, Noriaki and Liu, Ren-Jye, Quality Improvement to Meet Competitive Fringe (August 15, 2012). ISER Discussion Paper No. 854. Available at SSRN: https://ssrn.com/abstract=2129634 or http://dx.doi.org/10.2139/ssrn.2129634