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Markets with Technological Progress: Pricing, Quality, and Novelty

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  • Ludwig von Auer
  • Mark Trede
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    Abstract

    New and old products differ in two respects: quality and newness. Whereas a higher quality of a new product always benefits consumers, the newness itself benefits some consumers, but not others, and for some, it is even a disadvantage. We capture these features in a Hotelling model of OverLapping Innovators (HOLI model), entailing a sequence of static Hotelling games of horizontal product differentiation (newness), that we extend by vertical product differentiation (quality). In this model, the firms compete on quality and price. Using advanced dynamic hedonic regression methods, we empirically investigate the pricing policy of firms in the German laser printer market. We show that their pricing corresponds to our model with the seller of the new product acting as the Stackelberg follower.

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    File URL: http://www.uni-trier.de/fileadmin/fb4/prof/VWL/EWF/Research_Papers/2014-05.pdf
    File Function: Second version, 2014
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    Bibliographic Info

    Paper provided by University of Trier, Department of Economics in its series Research Papers in Economics with number 2014-05.

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    Length: 29 pages
    Date of creation: 2014
    Date of revision:
    Handle: RePEc:trr:wpaper:201405

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    Related research

    Keywords: Hotelling; vertical product differentiation; hedonic regression; Stackelberg; laser printer;

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    1. Ariel Pakes, 2002. "A Reconsideration of Hedonic Price Indices with an Application to PC's," NBER Working Papers 8715, National Bureau of Economic Research, Inc.
    2. Deltas, George & Zacharias, Eleftherios, 2006. "Entry order and pricing over the product cycle: The transition from the 486 to the Pentium processor," International Journal of Industrial Organization, Elsevier, vol. 24(5), pages 1041-1069, September.
    3. Andrew F. Daughety & Jennifer F. Reinganum, 2005. "Imperfect Competition and Quality Signaling," Vanderbilt University Department of Economics Working Papers 0520, Vanderbilt University Department of Economics.
    4. Andrew F. Daughety & Jennifer F. Reinganum, 2004. "Competition and Confidentiality: Signaling Quality in a Duopoly when there is Universal Private Information," Vanderbilt University Department of Economics Working Papers 0417, Vanderbilt University Department of Economics.
    5. Anderson, Simon, 1987. "Spatial competition and price leadership," International Journal of Industrial Organization, Elsevier, vol. 5(4), pages 369-398.
    6. Ludwig Auer, 2007. "Hedonic price measurement: the CCC approach," Empirical Economics, Springer, vol. 33(2), pages 289-311, September.
    7. Andreas IRMEN & Jean-François THISSE, 1996. "Competition in Multi-Characteristics Spaces: Hotelling Was Almost Right," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9613, Université de Lausanne, Faculté des HEC, DEEP.
    8. Dos Santos Ferreira, Rodolphe & Thisse, Jacques-Francois, 1996. "Horizontal and vertical differentiation: The Launhardt model," International Journal of Industrial Organization, Elsevier, vol. 14(4), pages 485-506, June.
    9. L von Auer & M Trede, 2012. "The dynamics of brand equity: a hedonic regression approach to the laser printer market," Journal of the Operational Research Society, Palgrave Macmillan, vol. 63(10), pages 1351-1362, October.
    10. Ernst R. Berndt & Neal J. Rappaport, 2001. "Price and Quality of Desktop and Mobile Personal Computers: A Quarter-Century Historical Overview," American Economic Review, American Economic Association, vol. 91(2), pages 268-273, May.
    11. Peter M. Noble & Thomas S. Gruca, 1999. "Industrial Pricing: Theory and Managerial Practice," Marketing Science, INFORMS, vol. 18(3), pages 435-454.
    12. Ludwig von Auer & Mark Trede, 2010. "The Dynamics of Brand Equity: A Hedonic Regression Approach to the Laser Printer Market," CQE Working Papers 1210, Center for Quantitative Economics (CQE), University of Muenster.
    13. GABSZEWICZ, Jean J. & RESENDE, Joana, . "Differentiated credence goods and price competition," CORE Discussion Papers RP -2461, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    14. Nelson, Randy A & Tanguay, Tim L & Patterson, Christopher D, 1994. "A Quality-Adjusted Price Index for Personal Computers," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(1), pages 23-31, January.
    15. Triplett, Jack E, 1969. "Automobiles and Hedonic Quality Measurement," Journal of Political Economy, University of Chicago Press, vol. 77(3), pages 408-17, May/June.
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