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Product diffusion and pricing with market frictions

Listed author(s):
  • 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)

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.

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Article provided by Springer & Society for the Advancement of Economic Theory (SAET) in its journal Economic Theory.

Volume (Year): 19 (2002)
Issue (Month): 4 ()
Pages: 707-736

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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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