Theodore Palivos (Department of Economics, Louisiana State University, Baton Rouge, LA 70803-6306, USA) Derek Laing (Department of Economics, The Pennsylvania State University, University Park, PA 16802-3306, USA) Ping Wang () (Department of Economics, Vanderbilt University, Nashville, TN 37235, USA)
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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.
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Article provided by Springer in its journal Economic Theory.