The Impact of Design Quality-based Product Differentiation on the Competitive Dynamics in an Oligopoly

In this paper we examine the relationship between the firm's investments in design quality improvement and its ability to thrive or even survive in an oligopolistic setting. We start by providing the contextual background for our approach, and then proceed to formulate a differential game theory model with six stateand two control-variables for each duopolist. More specifically, we blend a generalized Lanchester-type combat model approach (which addresses the competitive market share dynamics based on the firms' prices, design quality and historical inertia levels) with a generalized Bass-type diffusion model approach (which incorporates the cooperative product-life cycle or market penetration/saturation dynamics). We analyze the partly competitive, partly cooperative, differential game theory model formulated. Our aim is to examine the pervasive, though not very visible, influence of several intraand inter-firm, design quality-related effects on both duopolists' optimal control decisions and costs and on the structure-conduct-performance linkages within the industry, over the long haul. Specifically, we will use an open loop approach, that we believe is quite robust, to obtain: i) each firm's marginal valuations of its intangible assets and liabilities; ii) a deeper understanding of the tax-subsidy adjustments to its marginal cost, the myopia-related adjustments to its effective discount rates, the adjustments to its effective reference quality level and to its ownand cross-elasticity coefficients of demand, strategic substitutability/complementarity, and the onset of saturation; and iii) the first order conditions for its two control variables in an interpret-