The strategic deployment of quality-improving innovations

How can a firm deploy an innovation to fully realize its rent potential? We use a game-theoretic model to study the deployment of innovations that enhance the quality of an existing product. Three deployment strategies are compared: captive use, where the firm uses the innovation to enhance the competitive position of its own product; licensing, where the firm shares the innovation with competitors; and independent selling, where the firm incorporates the innovation in a complementary product or service that is sold separately to consumers. We study how the interplay of efficiency and competitive considerations favors certain deployment options over others.

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