A stylized fact shows that firms rarely seek for radical breakthroughs and more frequently invest in small improvements of the existing technology. This paper proposes a model that compares firms' value when firms can invest in strategies implying different degrees of innovativeness. The model shows that incremental strategies emerge as a dominant strategy for oligopolists when imitation of incremental innovation is sufficiently slow and firms are not too asymmetric in their access to knowledge. If these conditions are not respected, the model exhibits an additional symmetric Nash equilibrium where firms select radical innovations.

Established firms appear to be very reluctant to abandon their current technology and move onto alternative, radically new trajectories (Baumol, 2004). Revolutionary breakthroughs are generally introduced by the new entrants, whereas the incumbent firms tend to invest in the incremental innovations. This stylized fact is elucidated here by developing a model that reproduces the mechanisms behind firms’ choice among the different innovative strategies. Whereas, there exists in literature, a huge debate concerning the effect of competition on the incentive to innovate, an exhaustive analysis of the determinants of alternative innovative strategies, and the effects in terms of market structure has not been carried out yet, although the theme appears to have crucial implications. This work aims at filling such a gap by investigating explicitly, the value of an investment in innovation, when innovation is pursued within the current technological trajectory or within a new one. The model depicts a situation of imperfect competition where firms choose the innovative strategy to be implemented. The distinction between radical and incremental innovations, usually captured in the literature by referring to the incorporated knowledge, is modeled on multiple dimensions: the level of the investment risk implied by them, the expected premium, the extent and duration of the impact on market structure. Thus, the decision between radical and incremental strategies is affected not only by the different degrees of risk and costs involved, but it also depends crucially on the appropriability regimes. A radical innovation, in fact, implies such a degree of novelty that it allows to apply for patent protection: the firm that wins the patent race takes the whole market. On the other side, an incremental innovation is not protected and thus, the innovator’s rents can be eroded by imitators: innovation peculiar features that make imitation difficult can counterpoint the decline in the innovator’s profits, but only partially. Moreover, an incremental innovation permits coexistence between the successful innovator and his rivals, whose profits decreases after the incremental innovation, but continues to be positive.

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