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The theoretical literature on technological competition has been mostly concerned with various aspects of innovative activity in a single market. By contrast, this paper studies the adoption of a sequence of product innovations in two markets characterized by a common technology base, and illustrates the effects of technological rivalry and preemption. Under a perfect information scenario, it is shown in a two incumbent model that if the innovation is drastic (total replacement of the old product), under certain conditions the fear of being preempted by the entrant forces the firms to diversify their product lines by adopting the innovations across each other's markets.
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