This paper studies optimal growth strategies of a multiproduct firm that invests in the qualities of different products, which have persistent effects on future payoffs and are modeled as a state variable of a stochastic game. We derive a unique Markov perfect equilibrium under a monotonicity condition. At the early stage, the firm focuses on the product with higher quality, and may switch its specialization. If the quality of the specialized good is high enough, the firm diversifies to capture demands for all products. However, the firm may lose its focus on either product and get no demand, due to a moral hazard problem.
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