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Innovation incentives in an intergrated marketed with vertical product differentiation

  • Rajat Acharyya

    (Department of Economics, Jadavpur University)

  • Prabal Roy Chowdhury

    ()

    (Indian Statistical Institute, New Delhi)

This paper examines whether integration of national markets fosters innovation in the technologically inferior country. In a simple set up where a technologically backward home firm and a technologically advanced foreign firm compete in qualities and prices in an integrated market, we find that the outcome depends on the speed of response of the two firms and their initial technological distance. If the domestic firm is not too far behind the foreign firm to begin with, and if it responds faster, then the technological gap may get reversed. Further, we find that integration may be welfare improving for both the countries. There are, however, distributional implications. While the consumers always gain from such integration, the firms may not.

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File URL: http://www.isid.ac.in/~pu/dispapers/dp06-02.pdf
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Paper provided by Indian Statistical Institute, New Delhi, India in its series Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers with number 06-02.

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Length: 23 pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:ind:isipdp:06-02
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  1. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  2. Donnenfeld, Shabtai & Mayer, Wolfgang, 1987. "The Quality of Export Products and Optimal Trade Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 159-74, February.
  3. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  4. Bandyopadhyay, Swapnendu & Acharyya, Rajat, 2006. "Does input sector liberalization promote quality innovation and exports?," International Review of Economics & Finance, Elsevier, vol. 15(4), pages 443-462.
  5. Acharyya, Rajat, 2004. "Product Standards, Exports and Employment An Analytical Study," MPRA Paper 30160, University Library of Munich, Germany.
  6. Acharyya, Rajat, 1998. "Monopoly and product quality: Separating or pooling menu?," Economics Letters, Elsevier, vol. 61(2), pages 187-194, November.
  7. Swapnendu Bandyopadhyay & Rajat Acharyya, 2004. "Process and Product Innovation: Complementarity in a Vertically Differentiated Monopoly with Discrete Consumer Types," The Japanese Economic Review, Japanese Economic Association, vol. 55(2), pages 175-200.
  8. Devereux, Michael B & Lapham, Beverly J, 1994. "The Stability of Economic Integration and Endogenous Growth," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 299-305, February.
  9. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November.
  10. Rosenkranz, Stephanie, 1995. "Innovation and cooperation under vertical product differentiation," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 1-22, March.
  11. Segerstrom, Paul S & Anant, T C A & Dinopoulos, Elias, 1990. "A Schumpeterian Model of the Product Life Cycle," American Economic Review, American Economic Association, vol. 80(5), pages 1077-91, December.
  12. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
  13. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
  14. Clemenz, Gerhard, 1990. "International R&D competition and trade policy," Journal of International Economics, Elsevier, vol. 28(1-2), pages 93-113, February.
  15. White, Lawrence J, 1974. "Industrial Organization and International Trade: Some Theoretical Considerations," American Economic Review, American Economic Association, vol. 64(6), pages 1013-20, December.
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