Towards a concept of strategic input: Evaluation and choice of a technology in a vertically differentiated market

Abstract

This paper attempts to define the notion of strategic input and to study the choice of techniques in a market with vertical product differentiation. For that purpose, two different theoretical frameworks are used: firstly, we are interested in models of vertical product differentiation which examine some economic conditions needed to obtain a positive market share. More specifically, the finiteness property implies the fact that a finite number of firms can co–exist in this kind of market. Consequently, we can conclude from this property that, under some conditions, firms will always try to produce the higher quality product even if this product does not generate highest profits. If these conditions are not fully met, firms would produce the product able to generate the greatest profit. However, these models are not concerned with technical and economic production feasibilities. In other words, without a technical and economic study concerning production possibilities, these models are not sufficient to decide which kind of product strategy firms must adopt. For this reason, we introduce, secondly, a technical and economic product representation which allows us (i) to complete the previous models through a study concerning the quality wishes of the demand side and the possibilities for the supply side to satisify them and, so, (ii) to present the choice of techniques in vertical product differentiation. On this basis, this paper develops the concept of strategic input which allows us to evaluate the economic weight of an input in the production process of quality. The interest of this notion rests on its ability to become a management tool for technological decisions.