Diversity and superiority in innovation processes

A product group consists of product varieties (phenotypes) that compete for the same customer budget. The paper introduces an approach to identifying separate markets by means of product group (genotype) delineation. The paper contrasts two basic ideas for analysing competition within a product group. The first idea relates to Lancaster’s suggestion that every product variety can be identified by its attributes or characteristics (L-model). The second idea relates to the monopolistic-competition model as popularised by Krugman (DS-model). With this latter approach, a product group potentially contains a large set of varieties, where customers as a group have a taste for variety. For each of the two paradigms, the paper presents and compares the process by which novel product varieties are introduced. In the framework of Lancaster, evolution tends to reduce the number of varieties due to development of superior alternatives. The Krugman framework rather predicts an evolution where the number of varieties may increase without limits. The contribution of the paper is to contrast the two perspectives, by comparing the change processes and by assessing the adhering equilibrium solutions. A major question is how these two conflicting perspectives should be interpreted. The paper ends by suggesting a framework that can resolve the conflict between the two perspectives. The L-model provides a theoretical framework for how a separated market can be delineated, whereas the DS-model is more ad hoc in this sense. The prime demarcation aspect is however that in the DS-model diversity of products is generated by customers’ taste for variety. This must not be interpreted as a case, in which each customer consumes of all varieties at each point in time. A more reasonable interpretation is that a customer during a time period exercises the taste for variety. In contrast, a customer in the L-model purchases two or several varieties only when there is no product available with the des
QC 20201216