Innovation efficiency and firm competition

Abstract

This paper explores the effects of innovation efficiency on technology gap and product diversity between a leading firm and its competitor. Our analysis shows some interesting results: when innovation efficiency is sufficiently large and increases, the leading firm may expand technology gap, and counter-intuitively, this may reduce its price because the leading firm will choose to reduce product diversity which intensifies price competition. We have also examined the role of innovation efficiency on consumer surplus and social welfare. Managerial implications are discussed.