A theory of product selection (a model of a NIC)

Abstract

The objective of this work is to theoretically evaluate an important aspect of a Newly Industrializing Country (NICs): Korea. Namely, the behaviour of firms in Korea competing with firms in an industrialized country after all Government intervention of the former is withdrawn. This aspect is considered in the main part while a descriptive introductory part introduces the Korean economy as a NIC. We construct a simple asymmetric duopoly model where firms conjectures play an important role in deriving the Perfect Equilibrium for a two stage game. Different costs of production and first mover advantage form the basis of the asymmetry. We find that under Cournot conjectures assumption for the marketing stage and certain cost conditions, it is profitable for the incumbent firm to stay a leader and the follower to remain a follower. For some cost conditions and a credible threat at the disposal of the follower, the incumbent firm may be forced to stay a leader even though it is more profitable to became a follower. We examine possible licensing rules the leader may propose to the follower. The dominant strategy, we find, is a licence fee that is a function of the quality difference between the top quality of the market leader and the level of quality it is selling to the follower. There will be a cost to the leader in terms of a lower licence fee to prevent possible leap forgging. Once we allow for free copying, we find that the follower will copy closely the new product of the leadership. Under Bertrand conjectures assumption, we find that unless the firm with higher production cost remains the leader offering a higher quality product, it will be driven out of the market, i. e., either it has to innovate or-die