UCLA

This collection of essays considers three cases where two firms innovate in an imperfectly competitive market. In the first chapter, I introduce a novel model that represents the vertically differentiated industry, wherein the leader and the follower innovate continuously. I uncover the determinants of the innovation of firms, focusing on the ratio between the quality levels of their products, a key factor in deciding to innovate. Firms innovate to receive more profits from higher quality. Moreover, they choose the effort of innovation to widen the distance between the quality of two products. Consequently, firms tend to keep the distance of the quality constant. The second chapter extends the model in the first chapter, adding radical improvement to the quality by innovation, leapfrogging. I show that two firms are likely to innovate actively with the possibility of leapfrogging. The momentum of leapfrogging is powerful when the quality of two firms is similar to each other and when the possible size of the jump from the innovation is larger. Finally, in the last chapter, I introduce the model with the dynamic innovation of firms, which produces complementary goods: the platform and the software. This model focuses on the software innovation induced by the innovation of the platform. I uncover the determinants of innovation for the platform firm and the software firm as well as the interdependence of the two firms' innovation choices.