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This paper studies dynamic competition in markets characterized by the introduction of technologically advanced next-generation products. Firms invest in new product effort in an attempt to attain industry leadership, thus securing high profits and benefiting from advantages relevant for the success of future product generations. The analysis reveals that when the current leader possesses higher research and development (R&D) competence, it tends to invest more in R&D than rivals and to retain its lead position. The leader's investment exhibits an inverse-U pattern as this advantage increases. In contrast, when the leader enjoys an advantage that originates from the persistence of reputation, it invests less than its followers. Now, followers' investment exhibits an inverse-U pattern as reputation advantage increases. Depending on the extent of leader reputation, industry structure can either exhibit frequent leadership shifts or prolonged incumbent dominance. The basic framework is extended to allow investments in additional marketing variables (e.g., advertising). Interestingly, the leader takes advantage of strong demand for its current product by focusing more on advertising, whereas the follower expends more on R&D. By shedding light on the implications of industry position for investment incentives and market evolution, the analysis provides valuable insights for formulating marketing strategy in fast-paced, high-tech business environments.
(High-Technology Marketing; New Product Development; Dynamic Capabilities; Technological Competition; Markov-Perfect Equilibrium)
Today's competition leaves only two possibilities: Take the lead or stay behind (Fujitsu Corporation 1994).
1. Introduction
Fast-changing, technology-intense markets are characterized by the successive introduction of next-generation products. For example, over the past two decades, the PC microprocessor industry has witnessed seven distinct hardware generations, each pushing the technological frontier further by offering faster clock speeds, increased number of instructions per clock cycle, and superior mathematical computing. Likewise, the home video game market has, since the late 1970s, seen six well-defined eras of advanced systems, each delivering higher graphics and sound quality. In both industries, in each generation, several firms introduced their latest product offering at roughly the same time, typically with only one firm securing supranormal profits (see Figure 1).
Although potential profit rewards motivate investment in new product activity, it may not be the case that all firms in a given industry possess the same research and development (R&D) or marketing capabilities needed to master future...