Abstract
How to achieve the innovation is becoming more urgent for the firms, in general, process innovation and product innovation are two primary types of innovation which firms adopt. This paper aims to describe a mechanism on the choice between cost reduction and quality improvement in a duopoly. In detail, we study the optimal invest strategies of each channel member in three different scenarios, utilising game theory and optimisation theory, the optimal invest strategies and price policies of each channel member are obtained and compared in three different scenarios. Finally, we analyse the effects of price sensitivity coefficient and innovation cost coefficients on two firms’ profits in three scenarios by using the numerical analysis.
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