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The Game Theory Analysis Of Product Innovation Strategies Of Firms Based On The Vertical Differentiation

Posted on:2009-08-30Degree:DoctorType:Dissertation
Country:ChinaCandidate:J T LvFull Text:PDF
GTID:1119360242995200Subject:Business management
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Technological innovation is the essential motive power of economic growth. Our government presented the strategic Objective of strengthening the capabilities of independent innovation and building an innovation-oriented country. The key measure is that we should strengthen the role of firms to make them the main source of independent innovation. In a market-economy, firms are self-managed. Their activities may conflict with the society's interests. In order to adopt adequate policies to guide the firms'technological innovation activities to the direction consistent with the society's interests, we must firstly acknowledge the rules of firms'activities. Technological innovation is service for the main goal of firm: maximizing the market value. It is a strategic tool, on the one hand, it must coordinate with the general competitive strategies, on the other hand, it must properly combined with other strategic tools.Technological innovation can be classified to process innovation and product innovation. Using the theory of Industrial Organization and Game theory, this dissertation investigated how firms in market-economy choose their strategies of product innovation. It can help managers of firms deeply acknowledge the strategic role of technological innovation, use it to strengthen firm's competitive power, accelerate the development of firm. It can also be used as the theoretic foundation of government's industry policies which goals are guiding firms'technological innovation activities to benefit the development of the industry and the society's welfare. In order to make this dissertation more innovative, I will not systematically study these issues, but deeply explore some special issues under the framework described above.In chapter 2 and 3, I investigate the important problem that how firms choose the objective quality level of their product innovation of non-durable goods. In chapter 4, I analyze the market entry strategies and product innovation strategies of firms which producing durable goods. For non-durable goods because the sales of current product will not affect the future demands of new product, in chapter 2 and 3, I will not consider the old product's effects, only explore the competition of new products which is vertically differentiated. For durable goods, the sales of current product will affect the future demands of new product, in chapter 4, the new products are vertically differentiated with the old ones.The summary of innovations in the dissertation is as following:In chapter 2, using a Game Theory model of vertical product differentiation with uncertain R&D, I analyze two competed firms having same level of innovation capability how to choose their new product's quality to maximize their profits. New conclusions are: because of the uncertainty of R&D, the situations under Bertrand competition altered, two firms enter the market sequentially, new products are differentiated, product innovation emerges. If both firms innovate, there will be minimum differentiation, both firms choose the highest quality level; after the success of one firm, if the other firm continue its R&D project, it will lower the objective quality level, the initial situation of minimum differentiation change. If one firm's capability of innovation are better than the other one, then the weak firm will choose lower quality level, the powerful one will choose higher level. If the weak firm is risk-loving, the powerful one is risk-averse, then the weak one will choose the highest level, the powerful one will choose lower quality level.In chapter 3, We explored an issue no other literatures have ever studied, that is if quality level is connected with R&D rate or leading time, two competed firms having different level of innovation capabilities how to select their new products'quality level, and how difficulty degree of R&D and the degree of competition affect the firms'selection and the profits of them. New conclusions are: (1)when the difficulty degree of R&D increase, the degree of differentiation decrease, the ratio of profits of weak firm to profits of the powerful one increase, the ratio of consumer surplus to social welfare increase. (2)when the degree of competition decrease, the quality level chosen by the weak firm increase, that of the powerful one decrease, the degree of differentiation descend, both firms'absolute profits ascend, the portion of profits increasing of the weak firm is far more than the powerful one, consumer surplus and social welfare decrease, the ratio of consumer surplus to social welfare decline. (3)both firms prefer Cournot competition, but from the point of view of society planner, Bertrand competition is better, there are interest conflicts between firms and society. The work of chapter 3 demonstrate that when R&D rate in connected with quality level, under some conditions, profits of the weak firm almost as much as profits of the powerful one, these profits can fund improving the weak firm's capability of innovation, gradually improve its weak market role. The theory of chapter 3 can be used to analyze the strategies how native firm whose capability of innovation is weak compete with international giant firm whose capability of innovation is better, it's a good theory reference for these weak native firm.The production and consuming of durable goods plays a very important role in whole economy. In chapter 4 I investigate the sales strategy and pricing strategy, market entry strategy and product innovation strategy when there is entry threat. The theory can be used as a reference for managers of firm to acknowledge and choose competitive strategy of durable goods and for government officers to evaluate, regulate and make industrial policies. I establish a two-period durable-goods game model in which there is both time-inconsistence of pricing and time-inconsistence of product innovation. The form of competition is Cournot quantity competition, the analyzing is far more complex than the model based on Bertrand price competition. I obtain some valuable new conclusions, and explain the economic implications of them.The new conclusions about the sales strategy and pricing strategy are: when the degree of competition between new products decrease, in the case of incumbent accommodate entry and do not innovate, under some conditions, price discrimination can be practiced; the case of incumbent accommodate entry and innovate can appear; the entrant would implement a cross-update policy. The time-inconsistency of monopolist's pricing have an effect on its pricing of first period. In the case of incumbent accommodate entry, when the profit of incumbent achieve its maximum, the entrant yet sells new product in both the new-purchase market and the upgrade market.The new conclusions about the product strategy and entry deterrence strategy, or about the equilibrium of the game are: when facing entry threat, the incumbent must consider the tradeoff between entry deterrence versus entry accommodation, and the tradeoff between innovating and not innovating. The advantage of entry deterrence is monopoly persisting. But entry deterrence may incur the expense of too many sales of old product in the first period. The benefits of product innovation of incumbent are: one is that the margin of new product is more than old product; the other is that the capability of innovation can strengthen the firm's power of deterrence; for the same level of entrant's innovation cost, the incumbent's first period sales level that can deter entry when innovating is less than the sales level when not innovating. But innovating needs cost. The equilibrium of game is complex, the incumbent's decisions of deter entry depend on not only the innovation costs of itself and the entrant, but also the degree of innovation. There exist critical values having relations with incumbent's innovation cost and the degree of innovation, when the innovation cost of entrant is less than the corresponding critical value, the incumbent accommodate entry, otherwise deter entry.The comparative statics show us how the degree of innovation and the innovation cost of the incumbent affect the equilibrium. When the degree of innovation increases, the incumbent's benefits of deterrence increase, the cost of deterrence decrease. When the incumbent accommodate entry, the change of the degree of innovation has no effect on the incumbent's decision of innovation; when the incumbent deter entry, as the degree of innovation increasing, the incumbent gradually prefer not innovating. When the innovation costs of the incumbent and the entrant in some special intervals, the critical values of deterrence depend on the innovation cost of the incumbent, the more of it, entry deterrence is more difficult or equally difficult.The welfare analysis identifies over-investment, under-investment or no inefficiency in innovation depending on the values of parameters.
Keywords/Search Tags:product innovation strategy, game theory analysis, vertical differentiation, quality level selection, durable goods, entry deterrence
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