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New product introduction and diffusion with costly search

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  • Chung Yi Tse

Abstract

Will the low search cost in the new economy help speed up new product introduction? The usual model of product market search suggests that a low search cost can turn out to have detrimental incentives on innovation and new product introduction as the low search cost erodes firms' market power, attenuating the profit from innovation. This usual model, however, misses the important dimension of product market search that how often it pays to search depends on the magnitude of the search cost. This paper studies a model of monopolistic competition with costly search, where the point of departure is that of a fixed cost of a shopping trip. With this fixed cost, the optimal search frequency is tied to the magnitude of the search cost. In this environment, a low search cost could turn out to be favorable to innovation. At a low search cost, consumers search more often, speeding up the diffusion of new products and possibly resulting in higher profits for firms, despite the erosion of market power.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 237.

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Date of creation: 2004
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Handle: RePEc:red:sed004:237

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Keywords: product market search; innovation; new product introduction;

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  1. Boyan Jovanovic & Peter L. Rousseau, 2001. "Vintage Organization Capital," NBER Working Papers 8166, National Bureau of Economic Research, Inc.
  2. Simon P. Anderson & Regis Renault, 1999. "Pricing, Product Diversity, and Search Costs: A Bertrand-Chamberlin-Diamond Model," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 719-735, Winter.
  3. Tse, C.Y.Chung Yi, 2004. "Search frictions, market power, and long-run growth," Journal of Economic Theory, Elsevier, vol. 116(2), pages 323-346, June.
  4. Pereira, Pedro, 2001. "Market power, cost reduction and consumer search," International Journal of Industrial Organization, Elsevier, vol. 19(9), pages 1457-1473, November.
  5. Kohn, Meir G. & Shavell, Steven, 1974. "The theory of search," Journal of Economic Theory, Elsevier, vol. 9(2), pages 93-123, October.
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