Competition and Product Innovation of Intermediaries in a Differentiated Duopoly

On an intermediate goods market we allow for vertical and horizontal product differentiation and analyze the influence of simultaneous competition for resources and customers on the market outcome. Asymmetries between intermediaries cannot arise just from distinct product qualities, but also from different production technologies. The intermediaries face either price or quantity competition on the output market and a monopolistic input supplier on the input market. We find that there exist quality and productivity differences such that for quantity competition only one intermediary is willing to procure inputs from the input supplier, while for price competition both intermediaries are willing to purchase inputs. Considering product innovation for symmetric productivities we derive equilibrium conditions on the investment costs and compare price and quantity competition. It turns out that on the one hand there exist product qualities and degrees of horizontal product differentiation for complements such that asymmetric investment equilibria fail to exist. On the other hand we find that there also exist product qualities and degrees of horizontal product differentiation for substitutes such that existence can be guaranteed if the investment costs are chosen accordingly.