1 Cost reduction, profits and incentive to innovate: a note Luigi Filippini 1 ITEMQ, Università Cattolica, Milan, Italy October 24st, 2000 Abstract In a Stackelberg (or Cournot) quantity competition model, this note shows that in the case of process innovation in both firms the profits of the leader or of the follower might decrease under simple and well accepted assumptions, and total profits might decrease. Keywords : duopoly, process innovation JEL classification : D4, O3 1 Università Cattolica - Largo Gemelli 1 20123 Milano (tel. 02-72342594; fax 02-72342406) e-mail LF@MI.UNICATT.IT I would like to thank Carlo Beretta, Marco Cozzi, Luca Femminis, Gianmaria Martini, Giorgio Negroni, Lucia Parisio, Neri Salvadori, Carlo Scarpa, A.Soubeyran, Piero Tedeschi, and especially Ferdinando Colombo and Luca Lambertini for their helpful comments and suggestions. I acknowledge financial support from MURST,Italy.