Process innovation and product innovation aimed at differentiation in industries with network externalities

By modifying Cournot model, the relationship between the process innovation and horizontal product innovation is investigated in a duopoly industry exhibiting network externalities. The purpose of horizontal product innovation (resp. process innovation) is to increase product differentiation (resp. lower marginal cost). The following conclusions are found: (i) when firms perform process innovation first and then horizontal product innovation, process innovation lowers product innovation efforts (i.e. they are substitutes), and the intensity of network externality increases the degree of R&D innovation substitution; (ii) when firms perform horizontal product innovation first and then process innovation, product innovation lowers or induces process innovation efforts (i.e. they are substitutes or complements) depends on the network externality, product compatibility and initial product differentiation.