Diversification: a road to inefficiency in product innovations?
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Motivated by recent empirical observations made in industries such as the automobile industry, this paper employs an agent-based industry simulation model to examine the strategic relationship between product diversification strategies and some aspects of the product innovation strategy of a single producer. In particular, it is established that an increase in the average degree of product diversification in an industry increases the incentive for a producer to reduce the time to market for innovations at the expense of product quality. However, if all firms adapt their strategies according to these incentives, this results in a severe loss of average firm profits in the industry and also to a reduction in consumer surplus. It is then studied how the strength of this dilemma depends on several parameters describing the market structure and patent policy.
KeywordsProduct innovation Product diversification Time-to-market Agent-based simulation
JEL ClassificationD83 L11 O32
We are grateful for helpful comments of two anonymous referees. The research assistance by Mark Perrey is gratefully acknowledged.
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