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The dynamics of innovation and horizontal differentiation

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  • Narajabad, Borghan
  • Watson, Randal

Abstract

We study innovation in a dynamic stochastic discrete-time duopoly with endogenous horizontal differentiation. Innovation takes the form of a quality ladder; horizontal differentiation is Hotelling competition. We compute Markov-perfect equilibria and study the effects on long-run innovation of changes in taste heterogeneity (transport costs) and firms' costs of relocating products. Innovation rises as the industry's long-run position moves toward products that are permanently co-located in the space of horizontal tastes. A large enough fall in taste heterogeneity will raise long-run innovation, while more costly product relocation lowers innovation if taste heterogeneity is high, and raises it otherwise.

Suggested Citation

  • Narajabad, Borghan & Watson, Randal, 2011. "The dynamics of innovation and horizontal differentiation," Journal of Economic Dynamics and Control, Elsevier, vol. 35(6), pages 825-842, June.
    • Handle: RePEc:eee:dyncon:v:35:y:2011:i:6:p:825-842
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    4. Anaya, Karim L. & Pollitt, Michael G., 2014. "Experience with smarter commercial arrangements for distributed wind generation," Energy Policy, Elsevier, vol. 71(C), pages 52-62.
    5. Pu-Yan Nie, 2013. "Innovation Under Spatial Duopoly," Prague Economic Papers, Prague University of Economics and Business, vol. 2013(4), pages 474-486.

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