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

Prajit K. Dutta, Saul Lach, Aldo Rustichini

Research output: Contribution to journalArticlepeer-review

59 Scopus citations

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. We emphasize that a key dimension to this competition is the innovation that leads to product differentiation and quality improvement. In a duopoly model with a single adoption choice, we derive endogenously 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 “incumbency inertia” hypothesis.

Original languageEnglish (US)
Pages (from-to)563-589
Number of pages27
JournalJournal of Economics & Management Strategy
Volume4
Issue number4
DOIs
StatePublished - Dec 1995

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