Of Shrimp and Men : Innovation, Competition and Product Diversity

De Pirro, Amanda and Foucart, Renaud (2022) Of Shrimp and Men : Innovation, Competition and Product Diversity. Working Paper. Lancaster University, Department of Economics, Lancaster.

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Abstract

Building on a model of competition with endogenous product differentiation and using data from the shrimp aquaculture industry, we show how a cost-reducing innovation can hurt the profit of the innovator by decreasing product diversity and strengthening competition. In the late 1990s, a US governmental program designed a new pathogen-free breed reducing the production cost of white legs shrimp. This innovation gave a temporary boost to the profit of American producers, largely specialized in that variety. However, over time other countries abandoned their native production to adopt the new breed. In this phase of technological catch-up US producers thus not only lost their cost advantage, but also the market power derived from the pre-innovation product differentiation.