We model the optimal behaviour of a multiproduct monopolist investing bothudin process and in product innovation in a dynamic setting. Product innovation reducesudthe degree of substitutability between any two varieties. First, we find thatudR&D efforts increase in both directions as the number of varieties grows. Second,udwe characterise the relative intensity of R&D activities according to the reservationudprice and the interaction between the number of varieties and the degree of productuddifferentiation. Finally, we show the existence of complementarity within theudR&D portfolio, i.e., decreasing marginal production cost prompts for an analogousudreduction of product substitutability, and conversely.
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