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Product diffusion and pricing with market frictions

Author

Listed:
  • 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)

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.

Suggested Citation

  • Theodore Palivos & Derek Laing & Ping Wang, 2002. "Product diffusion and pricing with market frictions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 19(4), pages 707-736.
    • Handle: RePEc:spr:joecth:v:19:y:2002:i:4:p:707-736
    Note: Received: August 16, 1999; revised version: March 6, 2001
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    Citations

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    Cited by:

    1. Laing, Derek & Palivos, Theodore & Wang, Ping, 2003. "The economics of 'new blood'," Journal of Economic Theory, Elsevier, vol. 112(1), pages 106-156, September.
    2. Ping Wang & Alison Watts, 2006. "Formation of buyer‐seller trade networks in a quality‐differentiated product market," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 39(3), pages 971-1004, August.
    3. Becsi, Zsolt & Li, Victor E. & Wang, Ping, 2005. "Heterogeneous borrowers, liquidity, and the search for credit," Journal of Economic Dynamics and Control, Elsevier, vol. 29(8), pages 1331-1360, August.
    4. Chang, Chia-Ying, 2012. "The role of market frictions on the price differential: A search-theoretical approach," Working Paper Series 2064, Victoria University of Wellington, School of Economics and Finance.

    More about this item

    Keywords

    Market frictions; Product diffusion; Vertical innovations; Schumpeterian growth.;
    All these keywords.

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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