New product introduction and diffusion with costly search
AbstractWill 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 InfoPaper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 237.
Date of creation: 2004
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product market search; innovation; new product introduction;
Find related papers by JEL classification:
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
- D40 - Microeconomics - - Market Structure and Pricing - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-02 (All new papers)
- NEP-ENT-2004-08-02 (Entrepreneurship)
- NEP-INO-2004-08-02 (Innovation)
- NEP-MIC-2004-08-02 (Microeconomics)
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