Process Innovation in a Duopoly

This paper develops a duopoly model with two competing firms and each firm has the opportunity to invest in process innovation to reduce production cost. Specially, this paper gains noncooperative game equilibriums under three scenarios, i.e. both firms invest in process innovation to reduce production cost, or both firms would not invest in process innovation, or only one firm invest in process innovation. Not only does this paper investigate the impact of the level of investment and the intensity of competition on the firm's choice of process innovation, but also distinguish the dominant equilibrium for firms. The results show that choosing to invest in process innovation is a dominant equilibrium for two competing firms if firms invest a lower cost to reduce production cost when the competition between two firms is not very fierce, or invest higher cost to process innovation no matter how fierce the competition between two firms is. The results in this paper not only expands the previous work of process innovation in the academic field, but also will contribute to the practice for competing firms to gain low-cost advantage by investing process innovation.