Process And Product Innovations In Vertically Differentiated Markets With Network Externalities

We analyze product and process innovations in a vertically differentiated duopoly in market with network externalities. Through assuming process innovation reduces marginal cost and product innovation improves product quality, we find that: (i) product and process innovations are complements (resp. substitutes) for the firm with low (resp. high) quality when the intensity of network externality is small; (ii) process innovation affects product innovation more intensely when exists network externality than not; (iii) network externality makes process R&D (resp. aggregate process R&D) outcome affected by the parameter of product innovation cost; (iv) aggregate process R&D outcome in industry increases with network intensity; (v) the firm with higher initial efficiency invests more in process. innovation and will obtain more demand and profit than the rival in equilibrium.