The strategic deployment of quality-improvement innovations

Abstract

While most of the literature on innovation has been concerned with the firm's research and development decisions, this paper addresses the question of how to deploy an innovation to fully realize its rent potential. More specifically, we use a game theoretic model to study the deployment of quality-improving innovation, i.e., innovations that enhance the quality of an existing (or basic) product. Three deployment strategies are compared: captive use, where the firm uses the innovation to enhance the competitive position of its product; licensing where the firm shares the innovation with competitors; and independent selling, where the firm incorporates the innovation in a complementary product or service which is sold separately to consumers. We identify three concerns that affect the deployment decision: achieving cost efficient production, ensuring coordinate pricing of the basic and enhanced products, and mitigating competition within products. Furthermore, we study how the interplay of these efficiency and competitive considerations favors certain deployment options relative to others