A strategic analysis of product and process innovation with spillovers

Research output: Chapter in Book/Conference proceedingBook Chapterpeer-review


We develop a two-stage non-cooperative R&D game of process and product
innovation in a duopoly model which is distinct from Yin and Zuscovitch (1998) in
the following way. Unlike the latter, we allow for process spillovers from which only the follower benefits in the model so that the follower’s marginal cost of production is reduced not only by its own process innovation but also by a fraction of the leader’s process investment . At the first stage of the game, the duopolists (the leader and the follower) will engage in product and process R&D. While product R&D is stochastic (in the sense that it realizes with a probability) and leads to the instantaneous discovery of a new product which leads to an outward shift of the firm’s demand schedule, process R&D reduces the marginal cost of production with certainty. The two firms compete in the product market in the second stage. As in Yin and Zuscovitch (1998), results are derived by assuming that in the first stage the firm chooses product innovation taking process innovation as given and vice versa and finally the impact of spillovers on product and process strategies is found. Our results show that the spillover rate plays a critical role in analyzing the interplay between process and product innovations. The central contribution of our work is to offer a conceptual model for determining the impact of spillovers on the industry’s innovation level and also for understanding the factors which might cause a firm to change its strategy from process to product when the spillover rate becomes small. Our results demonstrate that there exists a negative relationship between the spillover parameter and the product innovations of both the leader and
follower. This suggests that we may observe switching behavior in an industry when the spillover rate becomes small.
Original languageEnglish
Title of host publicationGame theory and applications, volume 12
EditorsLeon Petrosjan, V.V. Mazalov
Place of PublicationLondon
PublisherNova Science Publishers
ISBN (Electronic)9781600214684
ISBN (Print)1600214681
Publication statusPublished - 2007


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