Why Is It So Difficult to Optimally Choose Innovation? Lest We Forget the Real World

In order highlight the non-steady state and real world dynamics associated with competitive innovation we develop a model involving choice of product quality in a simple duopoly characterised by two key departures from the dominant framework of quality ladder: first, we consider firms who refrain from maximising short-run profits. Instead, firms are started their function or action by their long-run goal of survival and growth. Secondly, we introduce the full-cost pricing model as opposed to market clearing prices. Based on these two key features we are able to derive the dynamics that can characterise the evolution of product quality in the non-steady state. We establish that the presence of an unstable equilibrium creates a threshold effect, which can also give rise to either a virtuous or vicious, path of quality choices. We further show that the quality dynamics can exhibit chaotic behaviour. As a consequence, firms become unsuccessful to see systematic errors. Firms also become unsuccessful to make long-run predictions with certainty even though they act in a deterministic world. The corollary is that time profiles will separate exponentially and these time profiles begin very close together. We offer interesting simulations to support the theoretical findings.