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Product diffusion and pricing with market frictions

Theodore Palivos, Derek Laing () and Ping Wang ()

Economic Theory, 2002, vol. 19, issue 4, 707-736

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.

Keywords: Market frictions; Product diffusion; Vertical innovations; Schumpeterian growth. (search for similar items in EconPapers)
JEL-codes: O31 O41 (search for similar items in EconPapers)
Date: 2002-02-06
Note: Received: August 16, 1999; revised version: March 6, 2001
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