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Lambertini, Luca
Mantovani, Andrea
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Quaderni - Working Paper DSE No. 551
Alma Mater Studiorum - Università di Bologna, Dipartimento di Scienze Economiche (DSE), Bologna
We model the optimal behaviour of a multiproduct monopolist investing both in process and in product innovation in a dynamic setting. Product innovation reduces the degree of substitutability between any two varieties. First, we find that R&D efforts increase in both directions as the number of varieties grows. Second, we characterise the relative intensity of R&D activities according to the reservation price and the interaction between the number of varieties and the degree of product differentiation. Finally, we show the existence of complementarity within the R&D portfolio, i.e., decreasing marginal production cost prompts for an analogous reduction of product substitutability, and conversely
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