Optimal dynamic policies for product and process innovation

Relatively few studies have analytically examined incremental product and process R&D activities after a product is in the marketplace. In this paper, new product demand is modeled as a dynamic function of price and incremental product innovation, while process improvements influence costs. Optimal price, and product and process R&D expenditure patterns are studied analytically and with numerical methods. Results are partially consistent with existing hypotheses in the literature and, at the same time, some new insights are obtained. The main conclusion is that the rates of incremental product and process innovation over the product life cycle are a function of the interdependence between product and process improvements. Importantly, empirical innovation patterns matching each of the derived patterns have been reported by other researchers.