Product Innovation Incentives by an Incumbent Firm: A Dynamic Analysis

38 Pages Posted: 2 Sep 2014

See all articles by Herbert Dawid

Herbert Dawid

Bielefeld University - Department of Business Administration and Economics; Center for Mathematical Economics

Michel Keoula

Bielefeld University - Department of Business Administration and Economics

Michael Kopel

University of Graz

Peter M. Kort

Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER)

Date Written: August 2014

Abstract

We study in a dynamic framework how product innovation activities of a firm are influenced by its production capacity investments for an established product and vice versa. The firm initially has capacity to sell an established product, and it also has the option to undertake an R&D project, which upon completion allows the firm to introduce a new vertically and horizontally differentiated product to the market, thereby extending its product range. The breakthrough probability of detecting the new product depends on both the value of the firm's R&D stock and its current R&D investment. It is shown that the initial production capacity for the established product influences the intensity of R&D activities of the firm. In particular, there a constellations such that for large initial production capacity for the established product the firm never invests in R&D and the new product is never introduced. For small initial capacity the firm keeps investing in R&D implying that eventually the new product is always introduced. Finally, for an intermediate range of initial capacity levels the firm initially invests in product R&D, but then reduces these investments to zero. In this scenario the new product is introduced with a positive probability, which is however substantially smaller than 1. From a technical perspective this analysis gives the example of a new type of Skiba threshold phenomenon in the framework of a multi-mode optimization model.

Keywords: product innovation, multi-product firm, R&D, piecewise deterministic optimal control, Skiba curve

Suggested Citation

Dawid, Herbert and Keoula, Michel and Kopel, Michael and Kort, Peter, Product Innovation Incentives by an Incumbent Firm: A Dynamic Analysis (August 2014). Bielefeld Working Papers in Economics and Management No. 11-2014. Available at SSRN: https://ssrn.com/abstract=2489928 or http://dx.doi.org/10.2139/ssrn.2489928

Herbert Dawid (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany
+49-521-1064843 (Phone)
+49-521-1062994 (Fax)

Center for Mathematical Economics ( email )

Postfach 10 01 31
Bielefeld, D-33501
Germany

Michel Keoula

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

Michael Kopel

University of Graz ( email )

Universitaetsstrasse 15 / FE
A-8010 Graz, 8010
Austria

Peter Kort

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

HOME PAGE: http://center.uvt.nl/staff/kort/

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

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