Process and Product Innovations: Complements or Substitutes?

This paper analyzes rms simultaneous choice in the intensity of process and product innovations, in market with vertical prod- uct di¤erentiation. Considering both monopoly and oligopoly models, we show that di¤erent shocks on the demand and cost side allow either a sort of complementarity or a sort of substi- tutability between the two kinds of innovation. Namely, demand shocks (increase) cause a complementary variation (increase) in both innnovations and in both monopoly and oligopoly, while an exogenous increase in production costs enhances process inno- vation and worsen product one in monopoly and for a duopoly leader, while for a duopoly follower it increses both innovations. Morover, the low quality rm is more e¢ cient than the monop- olist and the high quality one in process innovation. Conversely, a high quality rm has a better performance in terms of product innovation compared to a monopolist and low quality one.