The product cycle hypothesis: The role of quality upgrading and market size

Yan Ma

International Review of Economics & Finance, 2015, vol. 39, issue C, 326-336

Abstract: We develop a dynamic model in which the timing of innovating firm to relocate the production of a new product from North to South is endogenously determined. The decision of whether to produce in the South involves a trade-off between marginal cost savings from lower wages against a fixed coordination cost. The innovating firm invests in R&D to improve the quality of a new product, which raises the size of the market and the cost savings from producing in the South. We demonstrate that a new product is initially produced in the North and its production location is shifted to the South when its quality is sufficiently improved. We also investigate the interaction between the location of production and the rate of quality improvement.

Keywords: Product cycle; Quality improvement; Coordination cost; Market penetration (search for similar items in EconPapers)
JEL-codes: F12 F23 L22 O33 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:39:y:2015:i:c:p:326-336

DOI: 10.1016/j.iref.2015.04.014

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