Product and Process Innovations in a Horizontally Differentiated Product Market

Abstract

For horizontal product differentiation, the paper examines the effects of the level of competition on the firm's decision between a product and process innovation. When firms have to choose between the two types of innovation, it is demonstrated that both firms undertake the product innovation when the competition is intense, they choose different investment projects in intermediate competition, and they pursue cost--reducing innovations when competition is less intense. If firms may pursue both innovations, they mix the types depending on the innovation cost structure. Again, firms incur higher costs into product innovations, when the competition is initially intense.Product innovation; Process innovation; Horizontal product differentiation