The authors modify the price-setting version of the vertically differentiated duopoly model by Aoki (Effect of Credible Quality Investment with Bertrand and Cournot Competition, 2003) by introducing an extended game in which firms noncooperatively choose the timing of moves at the quality stage....

We develop a model of vertical innovation in which firms incur a market entry cost and choose a unique level of quality. Once established, firms compete for market shares, selling to consumers with heterogeneous tastes for quality. The equilibrium of the pricing game exists and is unique within...