| Abstract: |
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. This strategy is efficient when
imitation costs are sufficiently concave. In the opposite case, it is
preferable for the benchmark firm to accept the imitation. Thus, according to
the shape of imitation costs, equilibria with "deterrence" or with
"accommodation" occur, completing the current typology of strategic responses
to a threat of imitation. |