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A Closed Economy Model of Horizontal and Vertical Product Differentiation: The Case of Innovation in Biotechnology

  • Rohini Acharya
  • Thomas Ziesemer

In endogenous growth theory models have either increasing or constant ranges of product variety. Developments in modem biotechnology however show cases of increasing, decreasing or constant ranges of product variants. We present a simple endogenous growth model allowing for all of these three cases in one model. Quality weights that are exponential in the index of goods are multiplied to the quantity of goods in a love-of-variety utility function. Consumers prefer not to buy goods which are too expensive relative to their quality. The presence or absence of cumulated knowledge determines whether licensing fees, endogenous fixed costs for and the number of producers and the quantities produced are falling or constant, thereby allowing more or less room for variety in household budgets. Whereas new goods always appear, old goods may be selected away or are even reselected. The case of pure love-of-variety and total creative destruction are limiting cases in this model and cases of decreasing variety or initially increasing and later decreasing variety are additions to the present literature. The highly non-linear dynamics of the model are presented in simulations.

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Article provided by Taylor & Francis Journals in its journal Economics of Innovation and New Technology.

Volume (Year): 4 (1996)
Issue (Month): 3 ()
Pages: 245-264

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Handle: RePEc:taf:ecinnt:v:4:y:1996:i:3:p:245-264
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  1. Flam, Harry & Helpman, Elhanan, 1987. "Vertical Product Differentiation and North-South Trade," American Economic Review, American Economic Association, vol. 77(5), pages 810-22, December.
  2. Grossman, Gene M & Helpman, Elhanan, 1991. "Quality Ladders and Product Cycles," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 557-86, May.
  3. Grossman, Gene M & Helpman, Elhanan, 1990. "Comparative Advantage and Long-run Growth," American Economic Review, American Economic Association, vol. 80(4), pages 796-815, September.
  4. Young, Alwyn, 1991. "Learning by Doing and the Dynamic Effects of International Trade," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 369-405, May.
  5. Philippe Aghion & Peter Howitt, 1990. "A Model of Growth Through Creative Destruction," NBER Working Papers 3223, National Bureau of Economic Research, Inc.
  6. Paul Romer, 1989. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
  7. Trostel, Philip A, 1993. "The Effect of Taxation on Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 327-50, April.
  8. Filip Abraham, 1994. "Social protection and regional convergence in a European Monetary Union," Open Economies Review, Springer, vol. 5(1), pages 89-114, March.
  9. Alwyn Young, 1991. "Learning by Doing and the Dynamic Effects of International Trade," NBER Working Papers 3577, National Bureau of Economic Research, Inc.
  10. Gene M. Grossman & Elhanan Helpman, 1989. "Quality Ladders in the Theory of Growth," NBER Working Papers 3099, National Bureau of Economic Research, Inc.
  11. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  12. Young, Alwyn, 1993. "Invention and Bounded Learning by Doing," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 443-72, June.
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