An Analytical Modelling Approach for Assessing the Impact of Competition on a Homogenous Product Firm’s Investment Decision in Innovation

Abstract

Since the 2000s, the world has experienced a phenomenal growth of innovation initiatives in the homogenous product business. In this context, market competition is considered as one of the most important factors that influence innovation. Still, there is an absence of studies that capture the impact of competition on the innovation activities of homogenous product firms. Also, there is a dearth of analytical works that facilitate the theorization of the impact of competition on a firm’s innovation activities. It motivates us to propose an analytical methodology to assess the impact of the competition on a firm’s innovation in the context of the homogenous product market. We present a quantity competition based Cournot model to determine a homogenous product firm’s optimal output quantity and profitability. Here, we introduce a novel ‘innovation factor’ that describes a homogenous product firm’s innovation capability. We also devise the criteria regarding firm’s incentive to make an investment decision in innovation activity. According to our findings using analytical modelling and numerical analysis, a firm’s profitability decreases with increasing degree of competition. Also, a firm’s incentive to engage in innovation activity depends on the degree of competition, its innovation capability and fixed costs associated with the innovation.