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Endogenous Quality and Firm Entry

Rui Faustino

No 2019/0107, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: During economic expansions the net product creation and average product quality increase as firms introduce new products with higher quality.The introduction of new products with higher quality producesa quality bias in price level measures. In this paper I develop a firm-entry model with endogenous qualityof consumer goods. Following a TFP shock, the price level increases not only due to a larger number of varieties but also due to a higher average quality.Simultaneously, the channel of endogenous quality actsas a propagation mechanism to other variables in the economy, amplifying their response to shocks. This channel can also be either contractionary or shut down, depending on how consumers derive utility from quality.

Keywords: Firm-entry; business cycle; quality; prices. (search for similar items in EconPapers)
JEL-codes: E32 E20 L11 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-com, nep-ind and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:ise:remwps:wp01072019

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