Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/147384
Authors: 
Auer, Raphael A.
Sauré, Philip
Year of Publication: 
2016
Series/Report no.: 
CESifo Working Paper 6130
Abstract: 
We develop a model of vertical innovation in which firms incur a market entry cost and choose a unique level of quality. Once established, firms compete for market shares, selling to consumers with heterogeneous tastes for quality. The equilibrium of the pricing game exists and is unique within our setup. Exogenous productivity growth induces firms to enter the market sequentially at the top end of the quality spectrum. A central feature of the model is that optimization problems of consecutive entrants are self-similar so that new firms enter in constant time-intervals and choose qualities that are a constant fraction higher than incumbent qualities. The asymmetries of quality choice, which inevitably arise because the quality spectrum has top and a bottom, is thus overcome by sequential entry. Our main contribution lies in handling these asymmetries.
Subjects: 
vertical differentiation
product quality
non-homogenous preferences
natural monopoly
endogenous growth
quality ladders
JEL: 
A11
D43
L11
L13
O40
Document Type: 
Working Paper

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