The Relationship Between Competition and Incumbent’s Innovation

A static model is developed to analyse the incumbent’s innovation strategy under monopoly and duopoly. A number of potential objectives for the incumbent are modelled here, including the maximization of revenue, profit, and welfare (which are common among the network industries). Its marginal cost depends upon investment in new technologies and processes. The incumbent chooses its price and its level of investment in innovation. The incumbent’s elasticity of demand under both market structures and the incumbent’s market share under duopoly determine which market structure creates more incentives to innovate. For certain values of these variables, duopoly provides more incentives to innovate than monopoly. As expected, the incentives to innovate increase when the incumbent places greater weight on social welfare.     

Is Online Word of Mouth Higher for New Models or Redesigns? An Investigation of the Automobile Industry

Changing consumer preferences, entry of new competitors with better products, and product improvements by existing competitors make new products a necessary investment for most companies. In addition to the investments in R&D and production of new products, firms also need to invest in advertising to promote them. The growing use of social media by consumers therefore makes online consumer conversations an attractive additional format for firms to promote products at a lower cost. This is particularly so in the automobile industry where advertising costs are very high. Whether consumers discuss a newly introduced product, and help to promote it, however, may depend on how new the product is. This is the question that we investigate in the context of the automobile category. Specifically, we examine whether online consumer conversations are more likely for new models (e.g., Chevy Volt introduced in 2010) or redesigns of existing models (e.g., the redesign of Chevy Impala in 2010). We use data from two online sites where consumers discuss automobiles – consumerreports.org and edmunds.com – for our analysis. Our empirical investigation also accounts for the effects of sales on word of mouth and the simultaneity between sales and word of mouth. Additionally, we also consider the effect of satisfaction on word of mouth and the endogeneity of satisfaction. Our results across two datasets suggest that redesigns stimulate significantly more conversations than new models. Managerial and research implications of the findings are discussed.     

Friend or foe: Customer-supplier relationships and innovation

This study provides an empirical investigation of the impact of customer-supplier relationships on firm innovation in an interorganizational framework encompassing transaction cost economics, resource dependence theory, and the theory of incomplete contracts. Using a sample of U.S. firms for the period from 1980 to 2005, this study explores how customer concentration and customer bargaining power affect a supplier's process innovation and product innovation measured with R&D-to-assets ratio and patents (also citations), respectively. The findings imply that a concentrated customer base, which reflects a strong customer-supplier relationship as well as high switching costs, motivates suppliers to invest more in R&D and become more innovative. However, the evidence also suggests that strong customer bargaining power creates hold-up problems and forces suppliers to invest less in R&D and innovation. The results are robust to sophisticated econometric techniques that control for endogeneity and suggest heterogeneous effects of business partnerships on firm innovation.     

Signalling cost with investment in compatibility

When buyers value products in terms of the expected compatibility between the current and the new vintage, firms can invest strategically in R&D to control for the switching costs. Open announcements of R&D budgets transmit information. The announcements determine the buyers' beliefs of the compatibility. As only an efficient firm finds it optimal to have a large R&D-budget, a firm can signal its unit cost. The likely outcome is a unique separating equilibrium if the marginal cost of R&D is low but the uncertainty over the rival's unit cost large. With high R&D cost, the dominating motive is to affect the rival's cost belief.     

The timing of version releases: A dynamic duopoly model

In many R&D-intensive consumer product categories, firms deliver value to consumers through the quality enhancements provided by new and improved versions of existing products. Therefore, important marketing decisions relate to a firm’s strategy for developing quality enhancements and releasing new versions. This paper explores this type of product development using a dynamic duopoly model that endogenizes each firm’s decisions over how much to invest in R&D and when to release new versions. Specifically, I explore how two key industry fundamentals—the degree of horizontal differentiation and the cost of releasing a new version—affect firms’ product development strategies and, accordingly, the evolution of industry structure. I find that varying the degree of horizontal differentiation gives rise to three distinctly different types of competitive dynamics: preemption races when the degree of horizontal differentiation is low; phases of accommodation when it is moderate; and asymmetric R&D wars when it is high. Furthermore, I find that an increase in the cost of releasing a new version can induce firms to compete more aggressively for the lead and, in doing so, release new versions more frequently despite the higher cost.     

Competition Policy for High Technology Industries

I present a model of optimal product-market competition policy when industries differ in the potential for quality-improving technological advance. In a two-period, model, a competition authority with limited resources administers a deterrence-based competition policy toward two industries. In one of the industries, an incumbent firm chooses the level of resources to invest in a quality-improving R&D project. In the other industry, product quality is constant. Optimal policy requires the competition authority to administer a tougher competition policy before innovation, all else equal, the greater the potential quality improvement. I derive basic results for the case of one-time innovation, and extend them to the cases of sequential innovation and patent protection that confers limited antitrust immunity.     

Local competition, entry, and agglomeration

This paper analyzes competition between two spatially differentiated multi-product retailers who encounter entry from a low-cost discounter. We assess how entry affects the pricing of the incumbent stores and the role played by the location of the entrant. Our primary objective is to identify how traditional retailers respond to new forms of low-cost retailing. Results show that post entry, the prices for some products are higher than the pre entry. However, which product prices increase depends on the incumbent’s location. Contrary to conventional wisdom, we find that the store closer to the entrant is better off compared to the incumbent located further away. We empirically demonstrate the main workings of our theory using sales data from several grocery stores that saw entry by discount stores in their trading areas.     

Patent Protection,Startup Takeovers,and Open Innovation

Abstract

Open innovation largely relies on startup innovators transferring their R&D to incumbent firms. Yet, such innovators are at a disadvantage when faced with incumbents holding patent portfolios, raising the question why do such Lilliputian firms choose to innovate? In view of this, we study the impact of patent protection on the innovation incentives of startup firms in a dynamic model where an incumbent faces a sequence of potential startups and the incumbent’s chance of winning an infringement lawsuit increases with the size of its patent portfolio. It is shown that open innovation–style takeover deals generate extra benefits for the incumbent via its enhanced future bargaining positions, a part of which accrues to the current startup as an increased bargaining share, justifying R&D activity that would not have taken place otherwise.     

Some antecedents and outcomes of brand love

Survey research is employed to test hypotheses involving brand love, a new marketing construct that assesses satisfied consumers’ passionate emotional attachment to particular brands. Findings suggest that satisfied consumers’ love is greater for brands in product categories perceived as more hedonic (as compared with utilitarian) and for brands that offer more in terms of symbolic benefits. Brand love, in turn, is linked to higher levels of brand loyalty and positive word-of-mouth. Findings also suggest that satisfied consumers tend to be less loyal to brands in more hedonic product categories and to engage in more positive word-of-mouth about self-expressive brands.     

Are Intellectual Property Rights Detrimental to Innovation?

Intellectual property rights are legal constraints that limit conditions of entry in industries where incumbents are innovators. The set of legal constraints is the same for all industries, and there is no consideration of the possibility that the externalities created by entry in a given industry may not necessarily be negative for the incumbent, or that the incumbent's R&D expenditures might actually be detrimental to new entrants. We show that one unique set of legal rules can foster innovation in some industries and be detrimental in others. Our model is illustrated by case studies from the Information and Communication Technologies industry.     

Cooperative and non-cooperative R&D and trade costs

We examine the effect of trade liberalization on the level and mode of R&D in an international duopoly setting. Firms have the choice to invest in R&D either independently or cooperatively. A reduction in trade cost increases R&D irrespective of the mode of R&D. However, an increase in spillovers has ambiguous effects on R&D. More precisely, we find that an increase in spillover leads to higher R&D activity under cooperation but lower R&D activity under non-cooperation. Concerning cooperation versus non-cooperation, we find that firms prefer cooperation only if trade costs are low. Consumers are better off under cooperation if spillovers are high. We find that there can be a mismatch between private and social incentives. If spillovers are low and trade costs are low then cooperation might be privately profitable but socially undesirable. On the other hand, if there are large spillovers and high trade costs then cooperation may be socially desirable but not privately profitable.     

Linking reputations through umbrella branding

This paper develops a theory of umbrella branding as a way to link the reputations of otherwise unrelated products. The analysis predicts that umbrella branding can credibly signal positive correlation between the qualities of the included products to consumers, but cannot certify high quality or signal negative quality correlation. Moreover, whenever umbrella branding signals perfect positive quality correlation, firms that already sell a high (low) quality product have stronger (weaker) incentives to invest in developing another high quality product than new entrants.     

Do Mature Firms Gain Higher Economic Value from R&D Investment?

Despite the significance of economic value indicators in the measurement of firm value, not much attention has been dedicated to how research and development (R&D) influences firms’ economic value. This study examines the relationship between R&D investments and firms’ economic value and considers the moderating role of age in the relationship using a dataset from manufacturing and information and technology firms in China. The results show that R&D investments impact firms’ economic value positively. This suggests that firms that invest in R&D are rewarded with a monopoly, which increases their market shares, thereby increasing economic value. Again, we find that older firms increase their economic value more than younger ones when they both invest in R&D. Thus, younger firms in China suffer from the liability of newness when they invest in R&D. It is recommended that these younger firms should strive to shorten the time to reap the returns from R&D investments.

     

Technical performance and firm size: Analysis of patents and publications of U.S. firms

This study focuses on the scientific output of firms of different sizes in different industries in the U.S. Both patents, and papers and publications are used as measures of technical output. Data from two samples of firms, one consisting of 225 large firms (annual sales at least $250 million and minimum annual R&D budget of $1 million) and the other consisting of 248 small and medium sized firms (annual sales between $10 to $200 million and annual R&D budget at least $10 thousand) have been presented here. The study shows that determinants of R&D expenditure are different in firms of different sizes. For the large firms, R&D expenditure depends on net income as well as its size, measured in terms of annual sales. For small size firms, R&D expenditure is closely related with sales, rather than the net income. For large firms, R&D expenditure is related to both sales and income, the latter being more important than the former. The two output measures, patents and papers are correlated, but the correlation is not a very strong one for small firms. Patent and papers are correlated significantly with both R&D expenditure as well as annual sales. The firm's growth is not linked with patents. On the contrary, there is a negative relationship between patent and R&D growth and patent and income growth in the case of small firms. Papers are not linked with growth variables for small firms. Finally, this study confirms the hypothesis that small firms are more productive in innovation than the large firms. Small firms are more efficient than their larger competitors in terms of patents and papers per million dollars of R&D expenditure.     

Technology strategy and new venture performance: A study of corporate-sponsored and independent biotechnology ventures

New ventures, companies eight years or younger, play a major role in the development of an emerging, high-technology industry. Corporate-sponsored new ventures (those supported by an established corporation) and independent ventures (those founded by independent entrepreneurs) frequently battle for industry leadership and financial success. Whereas both venture types use technology to achieve financial and market success, little is known about the differences in their technology strategies.Technology strategy is the plan that guides a new venture's decisions on the development and use of technological capabilities. This strategy covers six major areas. The first is selecting the pioneering posture, where a venture decides whether or not be among the industry's first companies to introduce new products (technologies) to the market. The second is determining the number of products to be introduced to the market. The third is choosing the extent of a venture's use of internal and external R&D sources. Internal sources usually refer to in-house R&D activities. External sources may include purchasing or licensing of technology from other companies, or joining strategic alliances to acquire that technology. The fourth is deciding the level of R&D spending. The fifth is selecting the combination (portfolio) of applied and basic research projects. Whereas basic R&D advances science, applied R&D leads to new products and technologies. The sixth, and final, dimension is the venture's use of patenting to protect any competitive advantages it might gain from its R&D activities.This article reports the results of a study that explored the differences in the technology strategies and performance of corporate and independent ventures. The biotechnology industry was chosen to test the study's hypotheses, using 112 ventures.Seven of the study's hypotheses focused on the potential variations in technology strategy between corporate and independent ventures. Independent ventures (IVs) were expected to surpass corporate ventures (CVs) in pioneering new products (technologies), using internal R&D, and emphasizing applied R&D. CVs were expected to surpass IVs in introducing new products, using external R&D sources, spending on R&D, and patenting. The study's remaining three hypotheses covered possible variations in new venture performance (NVP) and their sources.The results showed that IVs focused more on pioneering, pursued a more applied R&D portfolio, and emphasized internal R&D more than CVs. CVs utilized external technology sources, spent more heavily on R&D, stressed basic R&D, and used patenting more intensively than IVs. These results were consistent with the hypotheses. However, contrary to expectations, there were no significant differences between CVs and IVs in the frequency of new product introductions, probably because most ventures were at the invention, rather than the commercialization, stage.The results on the NVP of CVs and IVs were counter to expectations. IVs outperformed CVs, probably because of the high motivation of the IV owners who reaped the rewards of growth and profitability. Also, whereas CVs may have greater access to the resources of their sponsors, political conflicts and rigid corporate controls might have reduced their ability to achieve competitive advantages.The results also indicated that CVs and IVs appeared to gain competitive advantages from different technological choices. Pioneering, a focus on applied R&D, and extensive use of the internal R&D sources were also positively associated with the performance of IVs. Heavy R&D spending, the use of both internal and external R&D sources, frequent product introductions, and patenting were positively associated with the performance of CVs. Finding that technology strategies significantly impacted NVP should encourage executives to consider pursuing a formal technology strategy. Likewise, the finding that different dimensions of technology strategy influenced the performance of CVs and IVs in different ways has practical implications. CV managers can learn from their higher performing IV rivals. Also, because established companies frequently acquire IVs, information about their technology strategies can be valuable in assimilating the acquired ventures. Overall, the results show that technology strategy is an important factor in enhancing new venture performance.     

R&D policies, trade and process innovation

We set up a simple trade model with two countries hosting one firm each. The firms invest in cost-reducing R&D, and each government may grant R&D subsidies to the domestic firm. We show that it is optimal for a government to provide higher R&D subsidies the lower the level of trade costs, even if the firms are independent monopolies. If firms produce imperfect substitutes, policy competition may become so fierce that only one of the firms survives. International policy harmonization eliminates policy competition and ensures a symmetric outcome. However, it is shown that harmonization is not necessarily welfare maximizing. The optimal coordinated policies may imply an asymmetric outcome with R&D subsidies to only one of the firms.     

Steuerliche Förderung von Forschung und Entwicklung in KMU — Irrweg für Deutschland?

To foster R&D activities, German industry lobbyists and policymakers are discussing the introduction of tax incentives for R&D in small and medium enterprises (SME) — all the more because Germany is one of just six of the 35 OECD members without indirect R&D support. Based on a critical assessment of the arguments provided, we conclude that international experiences with R&D tax incentives are not as promising as often suggested. An appropriate transfer into the German tax system, considering its specificities, appears to be technically difficult. The high level of heterogeneity of German SMEs population suggests that not every SME requires R&D to be innovative, because empirical evidence shows multiple diverse innovation patterns that demand other forms of support. Acknowledging the existing range of SMEs, we propose that instead of introducing R&D tax incentives, the debate should be focused on how to strengthen and develop the existing innovation policy mix for SMEs.     

New product development process: An investigation of success and failure in high-technology and non-high-technology firms

Numerous studies have examined new product success and failure in an attempt to reduce failure rates. Because they share some common themes, the previous studies were categorized into the following five groups: (1) studies focusing on causes of new product successes/failures; (2) studies examining new product development processes; (3) studies investigating new product development strategy and performance relationships; (4) studies focusing on building models to predict new product performance, and (5) studies focusing on a single factor relating to new production success/failure.To fill some of the gaps in earlier studies, and include variables that have not been linked to new product success/failure before, 151 companies were surveyed in two industries, the medical instrument technology and food processing industries. The survey contained questions on the importance of six new product idea sources: (1) final customers; (2) R&D department; (3) marketing executives; (4) other executives in the firm; (5) competitors; and (6) free-lance investors. Seven factors that were proposed to relate to new product success/failure were: (1) competition; (2) product performance; (3) marketing; (4) price competitiveness; (5) product absolescence; (6) limited number of distributors; and (7) customer switching costs. In addition, an attempt was made to investigate the effects of technology and following new product development plans and procedures on new product success/failure.Survey results indicate that using customers as the sources of new product ideas ranks number one in terms of importance for businesses in both the medical instrument technology and food processing industries. Similarly, executives who are in charge of new product development rare poor product performance as the essential cause of new product failure in the food processing industry, followed by poor marketing and pricing. In the medical instrument technology industry, however, the most important cause of new product failure was considered to be customer switching costs followed by poor product performance. This is probably because of the high investments typical for products in the medical instrument technology industry (i.e.hospital equipment). New product failure rates also differed between the two industries studied. Companies from the food processing industry, on average, had an almost 8% higher new product failure rate than companies in the medical instrument technology industry (40.18%vs.32.43%).The level of technology (medical instrument technology—high tech vs.food processing industry—low tech) may account for the difference in the new product failure rate. Results also showed that following new product development plans and procedures relates to new product success in the food processing industry, but not in the medical instrument technology industry.Using company R&D departments and free-lance inventors as sources of new product ideas is related to new product success in both industries investigated. In the food processing industry, price, competition, customer switching costs, and access to distribution channels influence new product success. Those firms that consider these variables important have higher new product success rates. Similarly, in the medical instrument technology industry, customer switching costs, access to distribution channels, product performance, product obsolescence, and marketing are important influences of new product success. Thus, firms that consider these variables when entering markets with new products may be more successful.It is possible to eliminate some causes of new product failure by entering markets earlier than the competitors. For example, early market entrants often have advantages over later entrants in selecting distribution channels. Early market entrants are also likely to create new customer switching costs for later entrants, however, this may not occur if the product introduced is not a technological breakthrough. Of course, not every new product introduced can be a technological breakthrough (e.g., many food products), but they can be new, reflecting the definition of new products.     

The different roles of product originality and usefulness in generating word-of-mouth

This paper explores how the dimensions of new products, specifically, the originality and usefulness of the products, influence word-of-mouth (WOM). In four studies, using lab and field setups, we find that originality and usefulness have different effects on WOM. We show that consumers spread more WOM about original products, but the valence of what they say depends on the usefulness of the product. Therefore, originality enhances the effect of usefulness such that consumers spread relatively more and more positively valenced WOM about original and useful products compared to less original but equally useful products. Conversely, consumers spread more and more negatively valenced WOM about original products that are not useful compared to less original products with the same level of low usefulness. The results indicate that product originality should be managed carefully when developing and positioning new products. Although originality increases buzz, it might lead to negatively valenced WOM when the usefulness of the product is perceived to be low.     

R&D Investments in Markets with Network Effects

We consider process R&D investments of firms in markets with network effects and incomplete product compatibility. Our results indicate that network effects increase the firms’ individual investments in R&D. The presence of network effects weakens the positive impact of R&D cooperation on firms’ R&D investments. Further, we show that R&D competition can bring socially optimal level of investment, and this is not possible in markets without network effects. Finally, our results suggest that innovation policy oriented at promoting R&D cooperation between enterprises can be counterproductive in markets with network effects and incomplete product compatibility.