Private Incentives to Innovate: Interplay of New Products and Brand-Name Reputation

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp08120.pdf Non-Technical SummaryThe automobile industry is one of the most innovative sectors in the economy and has become also very competitive in spite of its oligopolistic market structure. Besides, the triad traditional automotive markets (Japan, USA, and Western Europe) are very satiated markets. Thus, there should be some market power enjoyed by the automobile manufacturers to be able to pay for costly (and often risky) innovations and new products introductions. This paper concentrates on studying the introduction of new products in the automobile industry, in particular, on the measurement of the private returns to innovations for automobile manufacturers. The focus is on the two sources of market power that may allow the firms to get higher profits (and, thus, recoup investments): new products and brand-name reputation. On the one hand, margins can be secured temporarily through the launch of new products and the creation of new market niches due to less pricing pressure. This can yield profits to the innovators and allow them to recoup their investments, and may also bring gains to the consumers. On the other hand, the margins can be secured rather permanently through the establishment of strong brands. This generates larger cash flows, which leads to more investment being undertaken by the premium and luxury car manufacturers.The objective of this paper is thus to look whether there is a reward for innovation in the automobile market. The incentives to innovate are studied for the German automobile market, which is characterized by a high degree of new product introductions to boost sales and a large role of brand-name reputation, being also a lead market for many innovations. The results of the study show a new model and brand-name reputation appear to allow the innovative firms to get some market power and recoup their investments. New products however do not constitute a separate market niche but compete with old models. Nina Leheyda* Abstract: This paper studies the introduction of new products (increase in product variety) in the automobile industry. The focus is on the two sources of market power that may allow the firms to get higher profits (and, thus, recoup investments): new products and brand-name reputation. The effects of new products on the private incentives to innovate are investigated on the basis of the dataset for the German car industry for 200...

Geographical and Multi-Product Linkages of Markets: Impact on Firm Equilibrium Interactions (Some Evidence from the European Car Market)

“…The demand-side derivation on the basis of restricted two-level nested logit (i.e., without consumer heterogeneity) can be also found in Leheyda (2007b). The interaction of consumers' individual characteristics with products' characteristics is generally expected to allow getting more reasonable substitution patterns.…”