Managerial Economics and Strategy, 2/e

13.4 Cost and Innovation Strategies

A firm may be able to gain a cost advantage over a rival by moving first. Our analysis of the Cournot model in Chapter 11 shows that a firm with a lower marginal cost produces more and earns a higher profit than does its high cost rival. We start by examining two cases where a firm moves first to gain a marginal cost advantage over its rivals by undertaking process innovation or increasing the rate of learning by doing to lower its own marginal cost. Then we consider a firm’s strategic action that raises its rivals’ marginal cost by more than its own.

Investing to Lower Marginal Cost

A firm should invest in a process innovation, which improves the method of production for an existing product, if the resulting ...