Innovation and Reputation

Robert A Miller

Journal of Political Economy, 1988, vol. 96, issue 4, 741-65

Abstract: This paper analyzes a monopolist that markets successive generations of new and improving nondurable products. Prices, research intensity, and product innovations are derived as sequential equilibrium outcomes to a dynamic game with incomplete information. Asymmetric information is an important feature of the model. The monopolist is fully aware of the current product's quality, as are consumers who have tried it. However, the beliefs of other people are characterized by a probability distribution that depends on the monopolist's marketing strategy and the product's popularity. The analysis illustrates a new context in which price signaling might serve as a mechanism for ensuring that only high- quality products are marketed. Copyright 1988 by University of Chicago Press.

Date: 1988
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