Abstract: Using a twoperiod game model of Cournot quantity competition between new products, this article investigated the strategies of market entry and product innovation of incumbent and entrant in the industry of durablegoods, and made a welfare appraisal of firms’ innovation behaviors. It is found that whether the incumbent deters entry depends on the innovation costs of incumbent and entrant, and the innovation extent of new products. Innovation can strengthen incumbent’s capability of deterrence. If the innovation extent increases, advantages of deterrence will become greater, expenses of it will decrease and incumbent is apt to not innovate when entry is deterred. In some cases, if the innovation cost of incumbent increases, deterrence will become more difficult. When the innovation cost of entrant is low, there is excessive incentive of innovation investment; when it is high, the incentive is insufficient; when it is at middle level, the interests of firms are consistent with those of social planner.