Innovation Complementarity in a Vertically Differentiated Monopoly

In a vertically differentiated monopoly with continuous consumer types we show that a process innovation can precede and induce an otherwise unprofitable product (innovation), thus pointing towards a complementarity between these two types of innovation. With fixed innovation costs we show that this holds irrespective of whether we have full or partial market coverage. Also the social incentive to innovate under social planning is greater vis-a-vis the private incentive under monopoly.