Coordinating R&D, Product Positioning, and Pricing Strategy: A Duopoly Model

This paper develops an integrated duopoly model for coordinating R&D, product positioning, and pricing strategy. The model can be applied to a broad spectrum of market structures and market conditions since it allows for bidirectional technology transfers (i.e., firms can learn from each other), partial or complete technology transfer, differential quality-adjusted production costs across firms, preference heterogeneity across consumers for different product quality levels, and different behavioral modes of competitive reaction (e.g., sequential or simultaneous decision-making). We show that the managerial implications differ sharply for information goods and physical goods and vary depending on the behavioral modes chosen by the firms and on whether the technology transfers are unidirectional or bidirectional. Interestingly, contrary to common belief, for certain scenarios, product differentiation can increase when technology transfers are bidirectional.