Simultaneous choice of process and product innovation when consumers have a preference for product variety

This paper analyses simultaneous product and process innovation if demand is characterized by preference for product variety. It investigates the strategic decisions of two identical duopolists, who choose production technology as well as product differentiation through R&D investment and discusses factors which determine the optimal proportion of R&D activities. If firms coordinate their R&D activities and either conduct R&D in one lab, or R&D-cost functions are sufficiently steep, they will invest more in R&D than under competition and shift the optimal proportion of R&D investment towards product innovation. Firms' investment is also driven to product innovation if consumers' willingness to pay is high, (C) 2003 Elsevier Science B.V. All rights reserved.