2007 International Conference on Management Science & Engineering (14th)
August 20-22, 2007 Harbin, P.R.China
The Comparative and Improved Study on the Synergy Development Game
Model of Product Innovation and Process Innovation
BI Ke-xin" 2, SUN De-hua2, LI Bai-zhoul
School of Economics and Management, Harbin University of Engineering, P.R.China, 150001
1
2 School of Economics and Management, Harbin University of Science and Technology, P.R.China, 150080
Abstract: On the basis of analyzing the patent race
game model of product innovation and process
innovation, the Cournot Bertrand game model of
product innovation and process innovation, the backward
induction game model of product innovation and process
innovation, and the differential game model of product
innovation and process innovation, this paper compares
these models from the viewpoint of application scope of
game model, assumed condition of game model, and
players of game model, extends these game models
further, and constructs the synergy development game
model of product innovation and process innovation
under the condition of cooperative game. The objective
of this paper is to provide useful reference for
interrelated study of the synergy development of product
innovation and process innovation and enterprisers.
Keywords: product innovation, process innovation,
synergy development, game model, comparative and
improved study
1 Introduction
Product innovation and process innovation are two
important aspects of technological innovation in
enterprises. A product innovation is the introduction of a
good or service that is new or significantly improved
with respect to its characteristics or intended uses; a
process innovation is the implementation of a new or
significantly improved production or delivery methodE'l.
Product innovation and process innovation are
alternative ways of capturing customers 2]E3]. Now, using
game theory to study the decision-making of product
innovation and process innovation has become gradually
important instrument for many scholars because
decision-making of product innovation and process
innovation takes on typical game characteristic. And the
basic concept of game theory consists of player, action,
information, strategies, payoff, outcome, equilibrium.
Game consists of cooperative game and non-cooperative
Sponsored by the National Natural Science Foundation of
China (70473019), China Postdoctoral Science Foundation
(Grant NO. 20060390221), and Postdoctoral Foundation of
Heilongjiang Province (Grant NO. LBH-Z05069)
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game. Then the main method that game theory is applied
to economics filed is non-cooperative game[4][5].
Applying game theory to study the interrelated problems
on product innovation and process innovation can date
back to 1980s[6][7], and the manufacturing enterprises are
mainly study background. At present, the game method
for analyzing product innovation and process innovation
includes patent race game, Cournot game, Bertrand game,
backward induction, and differential game, and so on.
2 The analysis of game model of product
innovation and process innovation
2.1 The patent race game model of product
innovation and process innovation
Eswaran and Gallini (1996) developed a new
market model where heterogeneous consumers benefit
both from increased product variety and lower prices 8].
In their model, a social planner announces a patent
policy that sets the minimal extent to which the second
firm's variant must differ from the pioneer's product and
process technologies. Following the announcement,
R&D is undertaken by two firms, in sequence. The first
firm (firm 1) pioneers a new market with a product
innovation, using a new or old process, and the second
(firm 2) develops a variant of its rival's innovations. No
further entry occurs. Moreover, they explicitly assumed
that diseconomies of scope prevent the pioneer from
introducing additional products and processes. After the
innovation choices are implemented, the firms compete
by setting prices.
Their model considers the duopoly pricing game,
after the patent policy and innovation decisions have
been implemented. In the pricing game, firms 1 and 2
solve, respectively,
max(pI cl)MI (P1, P2 Y)
- I
PI
max(p2 - C2)M2 (PI, P2,Y) (1)
p2
Where Let y denote the distance of firm 2 from firm 1,
where the latter's position is chosen as the origin,
0 < y < 1/ 2. Denote the prices charged by firms 1 and 2
by p, and P2, respectively. Let c1 and c2 denote firm l's
marginal cost of production and firm 2's marginal cost of
production. Define x c1 c2 ,which is the extent to
which firm 2's marginal cost is lower than firm l's. Let
M, (P1I P2, y) be the market share (or equivalently, output)
of firm i(i = 1,2), for arbitrary prices and location of firm
2. And the unique Nash equilibrium prices of firms are
easily found by solving the pricing game defined in (1).
The social planner directs these choices with patent
process and product breadths (a,,f). Let,l/ denote the
breadth of the product patent awarded to firm 1.
Let a denote the breadth of the process patent awarded to
firm 1. The R&D cost to firm 1 of developing the new
product and corresponding process is assumed to be
given by F1. Let H(x, y) denote the R&D cost to firm 2.
Denote the equilibrium variable profit of firm
i by zi(x,y), i=1,2 . Firm 2 chooses its product
differentiation and production process, given the
announced patent policy (a,,/) and firm l's innovation
decision, by solving maX T2(X, Y) -H(x, Y) subject
x,y
to x >a,y>/ Since the R&D cost to firm 1 is
independent of where it locates in product space and
since its production cost is given, the only choice
confronting this firm is the entry decision. Anticipating
the equilibrium outcomes of the last two stages, and
given the social planner's choice of(a,,,6), firm 1 enters
if its profit is nonnegative, that is,
if zi [X(a, 8), Y(a, 8)] 0F >0 , where X(a,O/) and
Y(a, /8) denote firm 2's profit-maximizing process
innovation and product differentiation, respectively,
relative to firm 1.
In determining the optimal patent breadths, the
social planner has two sets of constraints to take into
account. One is the constraint that firm 1 makes
nonnegative profit: )rl(x,y) F1 >O. The above nonnegativity
constraint can be rewritten as y > N(x, F1) . The other
constraints are the incentive-compatibility constraints of
firm 2, given the patent breadths. The planner has to
incorporate firm 2's response into her optimization.
Formally, the social planner's problem is given
by maxW(x,y), where x = max{a, xp(y)},
a,/8
y = max{/1,yp(x)}, y > N(x,Fi)-
2.2 The cournot-bertrand game model of product
innovation and process innovation
Bonanno and Haworth (1998) used a model of
vertical differentiation where only one monopoly has a
chance to engage in innovation and analyzed the synergy
choice of product innovation and process innovation
under Cournot case versus Bertrand case[91. In the model,
there are N consumers with the same income, denoted
by E, but different values of the taste parameter 0. Each
consumer buys at most one unit. Considering the case
where there are two firms. Firm H sells a product of
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quality kH while firm L sells a product of quality kL,
with kH > kl >0 . Let pi be the price charged by
firm i(i=H,L) . Thus we can get demand functions
DH (PH, PL) and DL (PH, PL) I reverse demand
functions fH (qH, qL) and fL (qH, qL) .Where qH denotes
the output of firm H and qL denotes the output of firm L .
In the model, the two firms operate under constant
returns to scale. Thus firm i(i H,L) has a cost function
of the form ci (qi) =qciq,ci >0 Assuming that higher
quality is associated with higher costs: CH > CL . When
the two products are sold at unit cost, it is easy to see that
this is the case if and only if the following two conditions
are satisfied:
kH -kL > CH -CL, kLCH > kHCL (2)
In the Bertrand case, the profit functions are given by
HI(PH,PL) = N(PH CH)K1 kLJ
,;
HL (PH,PL) = N(PL-C ,kH kL kL)
In the Coumot case, the profit functions are given by
c (qH, qL) qHNkH -qHkH -qLkL CH
H L (qH, qL) qL ( H L) CL (4)
So we can get prices, output levels, and the equilibrium
profits of firms H and L under two cases.
Finally, they analyzed the choice between process
and product innovation. Assuming firm H has invested
in R&D and the corresponding cost is sunk. Supposing
that firm H has two options: (X it can instruct researchers
to pursue product innovation, expected to lead to an
A A
increase in the quality from kH to kH+ ALk; or (2) it
can instruct them to pursue process innovation, expected
A
to lead to a reduction in the firm's unit cost from CH to
CH-Ac. Assuming that there are no other costs involved
in the implementation of the innovation, for arbitrary
kH , kL, CH and CL satisfy (2). Analyzing Bertrand
iso-profit curve and Cournot iso-profit curve, the result is
that for high quality firm, a Bertrand competitor is more
prone to choose product innovation, while a Cournot
competitor is more prone to choose process innovation.
For low quality firm, a Bertrand competitor is more
prone to choose process innovation, while a Cournot
competitor is more prone to choose product innovation.
There are also scholars who analyzed the
relationship between product innovation and process
innovation. Yin and Zuscovitch (1998), Petsas and
Giannikos (2005) used Cournot game to analyze how
firm size affects on the synergy choice of product
innovation and process innovation'0[ll"]. Lin and Saggi
(2002) constructed a duopoly model of product
differentiation, studied the relationship between product
innovation and process innovation and compared the
choice between product innovation and process
innovation under different modes of market
competition'121. Then Weiss (2003) constructed a
two-stage game model, which also demonstrated the
conclusion from competition degree'13]. Filippini and
Martini (2004) extended the model of vertical
differentiation model constructed by Bonanno and
Haworth['4].
2.3 The backward induction game model of product
innovation and process innovation
Rosenkranz (2003) constructed a duopolistic
two-stage game with consumers have preference for
product variety. They buy all products but consider them
to be more or less substitutable to each other. She
analyzed a non-cooperative two-stage game under
complete information and applied backward induction to
the synergy choice of product innovation and process
innovation of firmsE'5]. For simplicity, assuming that
firms i, j face linear inverse demand functions of the
following form:
Pi (xi,xj,8i) = a- (xi+j)
where a> max{ci, j c,ci,c representing firms' marginal
c Analyzing the two cases, we can know how firms invest
production costs and measures the degree of product
substitutability with o < 5 <1. Considering a duopolistic
industry, consisting of two firms i , j that produce
quantities xi and xi . The two firms operate under
constant returns to scale. The product characteristics
which determine the degree of product substitutability
given by 8(8 =i +85), Si and 5i can also be influenced
by the firms i , j through R&D investment
in SiandS5i respectively with (0< 5i, 5j < 1/ 2).
Firms play a non-cooperative two-stage game under
complete information. In the first stage, firms decide on
their marginal costs by investing in a research project
generating a process innovation. Simultaneously, they
decide on the optimal degree of product differentiation
by investing in another research project generating a
product innovation. On the second stage, applying
backward induction, firms first analyze firms' quantity
decision in the second stage.
The quantity decisions of the second stage: two
firms offer quantities xi and xj, firm i's profit function is
given by fzi(xi,xj) =xiPi(xi,xj,) -cixi . Each firm
maximizes its profit given the quantity chosen by the
other firm, the quantity decisions chosen by firms are
Xi (Ci, Cj, a) and Xj (Cj, ci, a) -
The first stage of the game: firms choose the
optimal level of marginal costs and product
differentiation through R&D investment. Anticipating
the outcome of the stage-two game, firms choose optimal
R&D projects including process innovation and product
innovation. Through the former, they choose marginal
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costs of production; through the latter, they choose a
degree of product differentiation. Firms' strategies are
(cv,3J)E R2with c, E (0, c 0) and 5, E (o, 5°) with v = i, j .
The Nash-equilibrium strategies of both firms
(ci,8i) and (cj,- ) are defined by the mutual-response
property. That is for firm i (firm j 's maximization
problem is defined analogously):
(ci,5i8) E arg maxc {7 X = (ci,>cp,1i, 5) -K(ci) -G(i5) (6)
The model also considers the innovation decisions
under R&D cooperation: Now supposing that firms form
a research joint venture in which they coordinate their
R&D activities while they remain competitors in the
second stage of the game. If firms coordinate R&D
activities in the first stage, they choose R&D investment
as to maximize their joint profit zi + zf . Concerning the
organization of R&D, two cases can be considered: (1)
firms coordinate their research strategies by joint profit
maximization, but conduct research in two separate labs,
or (2) they coordinate their research strategies and
achieve efficiency gains by building-up only one
research unit. The first case can be characterized as
(5) R&D-cartelization, the second as RJV-cartelization.
on product innovation and process innovation. Besides,
Boone (2000) used a deterministic two-stage game to
analyze the effects of cmmpetitive pressure on a firm's
incentives to invest in product and process innovation '6].
2.4 The differential game model of product
innovation and process innovation
Lambertini and Mantovani (2004) built a
differential duopoly game over continuous time t E [0, o),
where at any instant, firms choose the quantity level and
the investment level in either product or process
innovation, or both innovation[17]. Firms produce
differentiated goods. The representative consumer's
utility function is a function of the consumption of the
two differentiated goods and the numeraire good m.
Constrained utility maximization for any given price pair
pi(t),pj (t)gives rise to the following demand system:
pi(t)= a -qi(t) -s(t)qj(t) Vi j,i,j= {1,2} (7)
Here the parameter s(t) represents the degree of
substitutability between the two products. At any time t,
the output level qi (t) is produced at a constant marginal
cost. Accordingly, the instantaneous cost function
is Ci (ci, qi, t) = ci (t)qi (t) -
Accordingly, the model describes the kinematic
equation of product innovation and process innovation.
The instantaneous cost of investing in product innovation
and process innovation is respectively given
by Axi (t)]2 and 8[ki (t)]2; both types of investment are
financed through internal funds. Instantaneous profits is
given by:
)ri (t) = [a - ci (t) - qi (t) - s(t)q i (t)]qi (t) - Y[xi (t)]
2
_[ki (t)]2 (8)
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 Assuming that firm i aims at maximizing the
discounted profit flow:
H i(t) f(t(e, 1dt
=
(9)
The corresponding current value Hamiltonian
function is:
Hi (t) = e pOt [;Ti (t) + /4 (ts + 1Ai (t)cj + Ayj (t)cjy ( 10)
Where A1(t) =u,ui(t)e, i(t) = uii (t)eot, Plj (t) = ,uy(t)eg' being
the co-state variable associated with s(t), c,(t), cj(t)
respectively.
In order to study the relation between product
innovation and process innovation, they start by
considering the two activities separately. (1) Firms invest
only in product innovation aiming at reducing the degree
of product substitutability. At this time, process
innovation is not taken into account, hence the effort
made by firm i at time t to reduce the cost of
production ki (t) = o and the marginal cost c does not
depend on firms' innovative activity. Without loss of
generality, the marginal cost is constant and common for
both firms, hence ci = c . According to analysis, provided
that certain condition, the steady state point sPd and
XPd which are the unique saddle point of the game when
firms invest only in product innovation. (2) Considering
the case where firms are allowed to undertake only
process innovation, hence the amount of effort made by
firm i at time t in order to increase product
differentiation xi (t)= 0 and the parameter s measuring
product substitutability does not change over time. And
the open-loop Nash equilibrium of the game with firms
investing only in process innovation is subgame (or
Markov) perfect. Provided that certain condition, the
steady state point cps and k' of the game when firms
invest only in process innovation.
Considering firms implement simultaneously
process innovation and product innovation.
Instantaneous profits are given by (8) and firms
maximize the discounted profit flow. The corresponding
Hamiltonian function writes:
Hi (t) = e Pt { [a - c(t)]qi (t) - qi (t)2 s(t)qi (t)qj (t) A[xi (t)]2
-
A3ki (t)]2 + A- (t)s(t [S xi (t) xi (t)] +Ai (t)ci (t) [177
- - (1 1
- ki (t) f1k (t)] + (t)cj (t) [77 kj (t) Oki (t)] }
- , - -
Analyzing the model, s* (c) and c (s) can be got. Through
the analysis ofs*(c)andc*(S), under certain condition, we
would know the condition of firms invest in process
innovation only, product innovation only and both
process and product innovation.
3 The comparative analysis of synergy
development game model of product
innovation and process innovation
According to foregoing analysis, we can see that
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many scholars study the synergy development of product
innovation and process innovation mainly under
non-cooperative game, and few study focus on the
synergy development game of product innovation and
process innovation under cooperative game. Then we can
turn the game model of product innovation and process
innovation into the synergy development game model of
product innovation and process innovation through
building up cooperation consciousness in the way of
negotiation and communication of players and setting up
mechanism of mutual trust, restraint, promises[18].
Furthermore, it is possible to realize Pareto Optimality
and promote the synergy development of product
innovation and process innovation. This paper compares
every game model of product innovation and process
innovation from the viewpoint of application scope of
game model, assumed condition of game model, and
players of game model in order to make enterprisers
understand fully application scope and assumed
condition of every game model.
3.1 The application scope of game model
From the viewpoint of application scope of game
model, we can conclude that patent race game model of
product innovation and process innovation mainly
discusses how social planner (government) chooses
optimal product and process patent breadths so as to
instruct decision-making of product innovation and
process innovation of enterprises in market and makes
product innovation and process innovation achieve
socially efficient mix; Cournot Bertrand game model
of product innovation and process innovation mainly
studies the synergy choice of product innovation and
process innovation because of different factors such as
enterprise characteristic, market competition degree, firm
size, and so on under Cournot case vs Bertrand case;
backward induction game model of product innovation
and process innovation firstly chooses product output of
firms, and then retroes to how enterprises achieve
optimal product differentiation and marginal cost
through product innovation and process innovation;
differential game model of product innovation and
process innovation studies the timing of adoption of
product innovation and process innovation at any given
time (product/technology life cycle). After these game
models are improved, they can apply to the synergy
development of product innovation and process
innovation.
3.2 The assumed condition of game model
From the viewpoint of assumed condition of game
model, we can see that there are mainly six assumptions
in patent race game model of product innovation and
process innovation. One assumption is on the types of
innovations examined; a second assumption is that of
quadratic transportation costs; a third assumption
maintained throughout the article is that all consumers
are served; fourth, demands are assumed to be inelastic
below some reservation price; fifth, they abstract from
strategic considerations, such as attempts by the pioneer
to influence the entrant's decisions; finally, licensing of
technologies is not permitted in the model. Bonanno and
Haworth (1998) , Filippini and Martini (2004) mainly
assumed that demand functions of consumers is function
of product price, product quantity, consumer quantity in
Cournot Bertrand game model of product innovation
and process innovation. Yin and Zuscovitch (1998)
principally assumed that during the game process, no
enterprises entry and has no information spillovers in
Cournot Bertrand game model of product innovation
and process innovation. Lin and Saggi (2002) assumed
that enterprises produce differentiated goods and the firm
size is asymmetry in R&D competition settings in
Cournot Bertrand game model of product innovation
and process innovation. The backward induction game
model of product innovation and process innovation
consumes that consumers have preference for product
variety. The differential game model of product
innovation and process innovation regards every variable
such as price, cost, and output as function of time. If we
turn these game models of product innovation and
process innovation into the synergy development game
models of product innovation and process innovation, we
should broaden some assumptions, at the same time, we
should also add some appropriate assumptions to these
models, and especially we should set up promissory
agreement between players.
3.3 The players of game model
From the viewpoint of players of game model, the
players of patent race game model of product innovation
and process innovation includes social planner and two
firms in market which engage in different innovation
activity. Bonanno and Haworth (1998) made players be
two firms (high-quality firm and low-quality firm), but
only one firm had a chance to innovate in
Cournot Bertrand game model of product innovation
and process innovation. Filippini and Martini (2004)
made players be two firms (high-quality firm and
low-quality firm), two firms had chance to innovate,
which engage in a three-stage game in
Cournot Bertrand game model of product innovation
and process innovation. Yin and Zuscovitch (1998) made
players in Cournot Bertrand game model of product
innovation and process innovation be two firms (large
firm and small firm), which participate in a two-stage
game. Lin and Saggi (2002) made players in
Cournot Bertrand game model of product innovation
and process innovation be two firms which engage in a
two-stage game. Players in backward induction game
model of product innovation and process innovation are
two firms which engage in a two-stage game. Besides,
the model also discusses the impact of R&D-cartelization
and RJV-cartelization on the strategies choice of product
innovation and process innovation. Players in differential
game model of product innovation and process
innovation are two firms which produce differentiated
product. Players in synergy development game model of
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product innovation and process innovation not only
include firms in industry, but also include product
innovation department and process innovation
department which are independent each other.
Moreover, we also find a remarkable issue: some
scholars come to an understanding for the function of
process innovation, i.e. process innovation is understood
as lowering of marginal production. But there is diversity
in understanding the function of product innovation. The
diversity in understanding is produced by study need.
Thereby, we must give clear definition on product
innovation and process innovation when we study the
synergy development game model of product innovation
and process innovation.
4 The improved study based on the
coordinated development game model of
product innovation and process innovation
According to comparative analysis on synergy
development game model of product innovation and
process innovation, this paper improves existing synergy
development game model of product innovation and
process innovation so as to promote the coordinated
development of product innovation and process
innovation. In the model, players are two firms in market,
or two independent innovation departments including
product innovation department and process innovation
department which look for benefits distribution scheme
recognized by two players through cooperation. The two
players achieve collective rationality under the condition
of without prejudice to individual rationality in order to
realize optimizing resources. Besides, the players have
common in interests, and on the basis of volunteer,
equality, mutual benefit, they come to a compellent
contract which will punish betrayer['8]['9].
4.1 The improved patent race game model of product
innovation and process innovation
To delete the assumed condition that licensing of
technologies is not permitted, and the other assumed
conditions remain changeless. After the patent policy and
innovation decisions have been implemented, two firms
set down the same price p. In the pricing game, firms 1
and 2 solve, respectively,
max (p -c1)M1 (p, y)
p
max(p - C2)M2(p,Y) (12)
p
The equilibrium prices of the firms are easily found by
solving the pricing game defined in (12).
Foreseeing this, the social planner directs these
choices with patent process and product breadths (a,,6).
Firm 2 chooses its product differentiation and production
process, given the announced patent policy (a, ,i) and
firm l's innovation decision, by solving
maxZ2(x,y)-H(x,y) subject to x>a,y>2, . In
x,y
fact, x >a, y > f8 can be broadened if firm 2 can get the
licensing of technologies from firm 1. Anticipating the
equilibrium outcomes of the last two stages, and given
the social planner's choice of(a,,8), firm 1 enters if its
profit is nonnegative, that is,
if z4[X(a,,8), Y(a,,8)] - F1 > 0 .
The decision of patent policy still keep changeless,
that is to say, the social planner's problem is still given
by max W(x, y), where x = max{a, xp(y)}, y = max{3, yp(x)},
ax,8
y N(x, FI).
>
4.2 The improved Cournot-Bertrand game model of
product innovation and process innovation
The paper improves the vertical differentiation
model built by Bonanno and Haworth (1998). Two firms
cooperate by maximizing combined profits. And the
other assumed conditions remain changeless in the
model.
In the Bertrand case, the combined profit functions
of two firms is given by
F(HH1L) = N(PH CH)K1 kH-kkL
PH
(1 'V
PH PL PL
+ N(PL -CL
kH -kL _ kL
In the Coumot case, the combined profit functions
of two firms is given by
f(lrcfJc) = qjNkH qHk qLkL
(14)
+ 1kH (N NqH CL)
(N)
So we can get prices, output levels, and the equilibrium
profits of firms H and L under two cases.
Finally, according to analyze Bertrand iso-profit
curve and Cournot iso-profit curve, two firms can choose
product innovation or process innovation.
4.3 The improved backward induction game model of
product innovation and process innovation
First, we assume that the two firms engage in R&D
cooperation and quantity cooperation. And the other
assumed conditions remain changeless in the model.
The quantity decisions of the second stage: two
firms provide quantities xi and xj, two firms combined
profit functions is given by)r, xx)=x,P,(xi,xj,x )-c,x,.
By solving first order derivative of xiandxj, we can
get output levels x andx<, the equilibrium profits <z
and i1z.
The first stage of the game: anticipating the
outcome of the stage-two game, firms choose optimal
R&D projects including process innovation and product
innovation. Through the former, they choose marginal
costs of production; through the latter, they choose a
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degree of product differentiation. Firms' strategies
are(CV,85) R2, wherev =,i .
In the R&D-cartelization case, the combined profit
functions of two firms is given by
lk = *i+ *j- K(ci) -K(cj) -G(5) - G(,5) (15)
In the RJV-cartelization case, the combined profit
functions of two firms is given by
Hs = ir, + 2 K(c,) - 2 K(cj) -2 G(9i) -G(j) ( 16)
Maximizing two firms combined profit functions
through (15) and (16), and solving first order derivative
of ci,,i, c j, 6i respectively, we can get equilibrium
strategies of both firms (ci, 8i) and (cj,1j) under the two
cases.
4.4 The improved differential game model of product
innovation and process innovation
The two firms choose respective quantity level and
innovation decision, and the other assumed conditions
keep changeless in the model. The combined profit
functions of two firms is given by
zc(zc, (t),ffj (t)) = [a - c, (t) - qi (t) - s(t)qj (t)]qi (t) - A[xi (t)]2
_/4[ki (t)]2 + [a - cj (t) - qj (t) - s(t)qi (t)]qj (t)
Axj (t)]2 _,8[kj (t)]2
(17)
Two firms aim at maximizing the discounted profit
flow:
ri (fl i (t) ri i (0)=
I (;Ti (t),;Tj (t))e-"'dt (18)
The corresponding current value Hamiltonian
function is:
Hi (t) = e-Pt[p(pi(t),ff(t)) + ,4 (t)s + 2,(t)c, + 2;(t)cj] (19)
Wvhere Ai (t) = pi (t)eot, Aii (t) = gii (t)eot, Ay (t) = Hij (t)eot
being the co-state variable associated to s(t), ci (t), cj (t)
respectively.
Two firms invest only in product innovation. At this
time, process innovation is not taken into account, hence
k(t) =kj(t)= oandc, =c=c, the combined profit functions of
two firms is given by
fT(fi (t),fT (t)) = [a c qi (t) s(t)qj (t)]qi (t) -yI[Xi (t)]2 (20)
- - -
+ [a c qj (t) s(t)qi (t)]qj (t) -Ax1 (t)]2
- - -
Further, we can get the steady state point of the game,
that is to sdy, sPd and xPd when firms invest only in
product innovation.
Two firms are allowed to undertake only process
innovation R&D, hence X,(t) = xj(t) = o and the parameter
s measuring product substitutability does not change
over time, the combined profit functions of two firms is
given by
fl(fi (t),ffj(t)) = [a - ci (t) qi (t) sqj(t)]qi (t) _,L[ki(t)]2
- - (21)
+ [a cj (t) qj (t) sqi (t)]qj (t) _,3[kj(t)]2
- - -
On the basis of (21), through restricting corresponding
condition, we can get the steady state point cps and
kps of the game when firms invest only in process
innovation
Considering firms implement simultaneously
process and product innovation. The corresponding
current value Hamiltonian function of firm i is:
Hi (t) = e-P'{t [a - c(t)]qi (t) - qi (t)2 s(t)qi (t)qj (t) -Axi (t)]2
- [7]J. F. Reinganum. Uncertain innovation and the
_38[ki (t)]2 + [a - c(t)]qj (t) qj (t)2 s(t)qj (t)q1 (t)
-
-_ytXj (t)]2 _ ,8[ki (t)]2 + A. (t)S(t)[g xi (t) xi (t)]
+ Aii (t)ci (t)[77 - ki (t) - Okj (t)] + Aj (t)cj (t)[77 - kj (t) - ki (t)]}
(22)
We can get steady state point of the game s* (c) and
c*(. Through s*(c) andc*(s), we will know the condition
where firms invest only in product innovation, invest
only in process innovation, and simultaneously invest in
product innovation and process innovation.
5 Conclusion
Nowadays, more and more scholars and enterprises
(especially manufacturing enterprises) pay attention to
the synergy development of product innovation and
process innovation. Because the synergy development of
product innovation and process innovation are influenced
by many factors[20], the strategy choice of product
innovation and process innovation depends on the
enterprise conditions and the industry which enterprises
belong to. Thereby, one suitable synergy development
game model of product innovation and process
innovation is very important for enterprises. From the
viewpoint of application scope of game model, assumed
condition of game model, and players of game model,
the paper deducts different synergy development game
models of product innovation and process innovation
from existing game models of product innovation and
process innovation by comparative analysis. These game
models have their own application scope and condition.
The aim of this paper is to provide useful reference for
related study and the decision of enterprisers.
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