The dynamics of innovation and horizontal differentiation

Borghan Narajabad and Randal Watson

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 6, 825-842

Abstract: We study innovation in a dynamic stochastic discrete-time duopoly with endogenous horizontal differentiation. Innovation takes the form of a quality ladder; horizontal differentiation is Hotelling competition. We compute Markov-perfect equilibria and study the effects on long-run innovation of changes in taste heterogeneity (transport costs) and firms' costs of relocating products. Innovation rises as the industry's long-run position moves toward products that are permanently co-located in the space of horizontal tastes. A large enough fall in taste heterogeneity will raise long-run innovation, while more costly product relocation lowers innovation if taste heterogeneity is high, and raises it otherwise.

Keywords: Dynamic; duopoly; Markov-perfect; equilibrium; Innovation; Horizontal; differentiation (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:35:y:2011:i:6:p:825-842

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