Trash it or sell it? A strategic analysis of development and market introduction of product innovations∗

In this paper a quantity-setting duopoly is considered where one firm develops a new product which is horizontally differentiated from the existing product. The main question examined is which strategic effects occur if the decision to launch a new product is considered separately from the decision to develop the innovation. We analyze a multi-stage game where a firm’s decision to introduce the newly developed product in the market is explicitly taken into account and characterize an equilibrium where the competitor of the potential innovator strategically over-invests in process innovation. In this equilibrium the competitor tries to push the potential innovator to introduce the new product thereby reducing competition for the existing product. It is shown that this effect has positive welfare implications in comparison to the case where the innovator commits ex ante to introducing the developed product.