Date Added: Apr 2011
This paper considers a probabilistic duopoly in which products are described by their specific attributes, this form of differentiation embodying the horizontal and vertical dimensions. Consumers make discrete choices and follow a random decision rule based on these attributes. A three-stage game is studied in which firms develop new attributes for their products (innovation), then may imitate the attributes of the competing product and finally compete in price. At the equilibrium, the firm selling the less appreciated product is generally incited to imitate its rival. Confronted to a threat of imitation, the benchmark firm sometimes decreases strategically its attribute index in order to diminish its unit cost of innovation and the differentiation on the market, deterring the imitation in this way.