Complementarity between product and process innovation in a monopoly setting

In this article we study complementarity between market-enhancing product innovation and cost-reducing process innovation in a monopoly setting. First, we consider the possibility for a firm to alternatively invest only along one of the two directions and compare the incentives of process vs. product innovation. Then, we allow the firm to invest simultaneously in both activities, showing that both investment levels and profit are higher than in the case of individual investment. Thus, product and process innovations are complementary, and the firm always prefers the simultaneous adoption of both activities.