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Markets with Technological Progress: Pricing, Quality, and Novelty

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  • Ludwig von Auer
  • Mark Trede

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.

Suggested Citation

  • Ludwig von Auer & Mark Trede, 2014. "Markets with Technological Progress: Pricing, Quality, and Novelty," Research Papers in Economics 2014-05, University of Trier, Department of Economics.
  • Handle: RePEc:trr:wpaper:201405
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    References listed on IDEAS

    as
    1. 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;The OR Society, pages 1351-1362.
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    5. Irmen, Andreas & Thisse, Jacques-Francois, 1998. "Competition in Multi-characteristics Spaces: Hotelling Was Almost Right," Journal of Economic Theory, Elsevier, pages 76-102.
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    7. Andrew F. Daughety & Jennifer F. Reinganum, 2008. "Imperfect competition and quality signalling," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 163-183.
    8. Ariel Pakes, 2003. "A Reconsideration of Hedonic Price Indexes with an Application to PC's," American Economic Review, American Economic Association, pages 1578-1596.
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    12. Ariel Pakes, 2003. "A Reconsideration of Hedonic Price Indexes with an Application to PC's," American Economic Review, American Economic Association, pages 1578-1596.
    13. Peter M. Noble & Thomas S. Gruca, 1999. "Response to the Comments on “Industrial Pricing: Theory and Managerial Practice”," Marketing Science, INFORMS, vol. 18(3), pages 458-459.
    14. Dan Levin & James Peck & Lixin Ye, 2009. "QUALITY DISCLOSURE AND COMPETITION -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 57(1), pages 167-196, March.
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    More about this item

    Keywords

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

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L63 - Industrial Organization - - Industry Studies: Manufacturing - - - Microelectronics; Computers; Communications Equipment
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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