Long-Run Market Configurations in a Dynamic Quality-Ladder Model with Externalities
CIRPEE Working Paper 15-03
28 Pages Posted: 12 Feb 2015 Last revised: 10 Mar 2017
Date Written: March 8, 2017
We analyze the type of market structures that arise in the long-run when quality externalities and asymmetric R&D capabilities exist in the context of a quality-ladder dynamic model. An example of such externalities is a patent release by the leading firm: an improvement of quality of this firm's good affects the quality of the other firms' products. This externality can be thought of as an increase in compatibility in a network. We show that it is possible for this model to generate, in the long-run, multi-modal probability distributions over different market structures from the same parameter values. In some cases, the lagging firm may even become the dominant firm depending on the degree of the externality. This may have implications for the estimation and simulation of this class of models.
Keywords: Differentiated-good markets, quality-ladder model, externalities, industry dynamics, market structures
JEL Classification: C61, C73, L13
Suggested Citation: Suggested Citation