Product diffusion and pricing with market frictions

Derek Laing, Theodore Palivos, Ping Wang

Research output: Contribution to journalArticle

3 Scopus citations

Abstract

We study pricing and product diffusion in a dynamic general equilibrium framework with product market frictions. Ongoing R&D activity leads, with an endogenously determined probability, to continual improvements in product quality. We characterize the steady-state equilibrium with endogenous product diffusion in which a number of different goods co-exist on the quality ladder. We show that the severity of the economy's market frictions is a crucial determinant of the pricing structure, the product diffusion pattern, the level of R&D investment, the rate of endogenous growth, the length of Schumpeterian product cycles and the possibility of multiple growth paths. Eliminating market frictions leads to a degenerate product ladder of precisely one step, containing only the most recent product, as in the monopolistic competition literature.

Original languageEnglish (US)
Pages (from-to)707-736
Number of pages30
JournalEconomic Theory
Volume19
Issue number4
DOIs
StatePublished - Jun 1 2002
Externally publishedYes

Keywords

  • Market frictions
  • Product diffusion
  • Schumpeterian growth
  • Vertical innovations

ASJC Scopus subject areas

  • Economics and Econometrics

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