Product and Process Innovation in Differential Games with Managerial Firms

We take a differential game approach to study the optimal choices of managerial firms concerning efforts in product an process innovation. We find the Nash equilibria under the open-loop and closed-loop information structure, and we compare the steady state allocations with the corresponding equilibria of markets populated by standard profit-maximising firms. We find that the managerial incentive leads firm to underinvest in product differentiation and to overinvest in process innovation, as compared to standard profit-maximising firms.