Product Innovations and Quality-Adjusted Prices

Abstract

A striking characteristic of high-tech products is the rapid decrease of their quality-adjusted prices. Empirical studies show that the rate of decrease of QAPs is typically not constant over time; QAPs decrease rapidly at early stages of the product and then the rate of decrease tapers off. Studies also suggest that the QAP is positively correlated with the rate of product introductions: The faster new products are introduced, the faster is the rate of decrease in their QAPs. This paper presents a dynamic model of product innovations consistent with these empirical regularities.

Keywords: Quality Adjusted Prices, Frequency of Innovations, Durable Goods, Obsolescence

JEL Classification: C73, L12, L63, O31