Product Innovation and Transportation Technology in a Cournot Duopoly

We consider a two-stage Cournot duopoly game with horizontally differentiated products where firms decide whether to improve transport technology or to activate product innovation. Transport technology increases the quantity sold in the market, while product innovation reduces product substitutability. We find that firms tend to invest in the relatively more efficient activity but there exists intervals characterized by (i) prisoner's dilemma; (ii) chicken game; (iii) coordination game. Of particular interest is that firms tend to avoid product innovation, even if a commitment by both firms in this direction would yield the highest aggregate profit