| Summary: | We analyze the effects of an imitating firm on the behavior of the innovatingfirm. The framework of analysis used is a dynamic duopoly model of vertical productdifferentiation, where both the innovator and the imitator compete simultaneously inprice and quality. We obtain that when the market is small, the presence of an imitatorencourages the innovator to increase its innovating process, so the entry of the imitatorshould not be obstructed; and, when the market is large, the imitator reduces the innovator’sincentives to invest its economic resources in R&D and to provide a higher quality, so theentry of the imitator should not be encouraged.
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