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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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    1. Ludwig von Auer & Mark Trede, 2018. "Markets with technological progress: pricing, quality, and novelty," Journal of Economics, Springer, vol. 124(2), pages 121-137, June.

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    More about this item

    Keywords

    Hotelling; vertical product differentiation; hedonic regression; Stackelberg; laser printer;
    All these keywords.

    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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