Competitive Entry and Pricing Responses to Product Innovation

In this paper, we study competitive response to a product innovation. We consider the dynamic interaction between a “Defender” (a firm with a first generation product) and an “Attacker” (a firm with a second generation product). The second generation product entry decision of the Defender, as well as the pricing decisions of both firms, are analyzed. Analytical results are derived by developing a 3-period pricing game, and studying closed-loop policies for a Nash equilibrium. These results allow us to identify strategies in which the Attacker can prevent (or delay) a competitive response by the Defender. Some empirical support for our analytical results is also provided by pricing data and information on the timing of successive product generation introductions in the semiconductor and personal computer industries.