Product innovation, diffusion and endogenous growth

Michael Klein and Fuat Sener

MPRA Paper from University Library of Munich, Germany

Abstract: We develop a model of Schumpeterian growth featuring a stochastic diffusion process where the rate of commercial success of product innovations is endogenously determined by advertising intensity. We consider both informative advertising, which young technological leaders use to increase the probability of diffusion, and defensive advertising, which incumbents use to prevent the diffusion of competing products. Economic growth depends positively on the arrival rate of product innovations and the diffusion rate of innovations into the mainstream market. We show that R&D subsidies shift relative investment incentives towards innovation and away from diffusion. This creates an inverted U-shaped relationship between R&D subsidies and both economic growth and welfare as innovations arrive more frequently, but fewer commercialize successfully. We find that lower advertising costs increase diffusion, growth, and welfare when advertising is purely informative. When we include defensive advertising, lower costs lead to socially wasteful increases in resources devoted to advertising without large increases in diffusion, reducing growth and welfare.

Keywords: Endogenous growth; innovation; diffusion; commercialization; advertising; marketing; R&D subsidies (search for similar items in EconPapers)
JEL-codes: M30 O31 O33 (search for similar items in EconPapers)
Date: 2021-06-25
New Economics Papers: this item is included in nep-gro, nep-ino and nep-tid
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Related works:
Journal Article: Product Innovation, Diffusion and Endogenous Growth (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:108470

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