Competition and Innovation in Technology-driven Markets

Competition and Innovation in Technology-driven Markets

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In technology markets, new generations of products often come paired with new features besides the increase in core capabilities. The new features can either be targeted at attracting new customers, or targeted at current customer needs. For example, Nintendo's new Wii video game system introduced an easier-to-use interface targeted at current non-gamers, while Microsoft's Xbox 360 game systems pushed the technology to High Definition gaming and introduced a more complicated controller for more detailed character control. Also, Apple's new iPhone is packed with high-tech options geared towards current cell phone users, while Jitterbug's OneTouch phone has only a couple of buttons for emergency calls. We call Microsoft's and Apple's behavior accelerating the technology treadmill. On the other hand, when the new feature emphasizes an alternate performance dimension to attract new customers as in Nintendo's and Jitterbug's case, we refer to this as stepping off the technology treadmill. We examine the conditions under which a firm will find introducing a new feature of either kind to be an optimal strategy. In our base model, two firms compete on a traditional dimension and on price in the current period, where the simultaneous equilibrium outcome yields a high-tech product and a lower-tech product. In the next period, each firm (in addition to choosing its product performance along the traditional dimension) decides whether or not to introduce either new feature for its product. Customer preferences for the new feature can be either positively or negatively correlated with preferences for the key performance dimension and we model the case where one end of the market dislikes the new feature (compared to the traditional) while the other end likes it. For example, when Nintendo announced their new inter-face, the core gamers ridiculed it as a gimmick, while current nongamers were drawn to the easier-to-use characteristic of the new feature. We find there are conditions under which the firms both introduce a positively correlated or negatively-correlated new feature. We also find conditions under which both firms target their own ends of the market, i.e., the lower-tech product comes equipped with a negatively-correlated new feature, while the high-tech product incorporates the positively-correlated new feature. Interestingly, in the latter case the lower-tech firm prefers that its new feature be only marginally attractive to existing users. If too many customers appreciate the negatively-correlated new feature, then the high-tech firm is also interested in introducing it, leading to both firms introducing a negatively-correlated new feature and reduced profit for the lower-tech firm. We then extend the model to allow the firms to design and market the previous exogenously given new features. As the firms are now free to choose the extent to which the new feature influences customer preference, we find a wider range of conditions under which both firms target their own ends of the market.In technology markets, new generations of products often come paired with new features besides the increase in core capabilities.

Title:Competition and Innovation in Technology-driven Markets
Author: Bo Van der Rhee
Publisher: - 2007

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