Beyond the Arrow effect: a Schumpeterian theory of multi-quality firms *

Hélène Latzer

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Abstract: This paper introduces multi-quality firms within a Schumpeterian framework. Featuring non-homothetic preferences and income disparities in an otherwise standard quality-ladder model, we show that the resulting differences in the willingness to pay for quality among consumers generate both positive investments in R&D by industry leaders and positive market shares for more than one quality, hence allowing for the emergence of multi-product firms within a vertical innovation framework. This positive investment in R&D by incumbents is obtained with complete equal treatment in the R&D field between the incumbent patentholder and the challengers: in our framework , the incentive for a leader to invest in R&D stems from the possibility for an incumbent having innovated twice in a row to efficiently discriminate between rich and poor consumers displaying differences in their willingness to pay for quality. We hence exemplify a so far overlooked demand-driven rationale for innovation by incumbents. Such a framework also makes it possible to analyze the impact of inequality both on long-term growth and on the allocation of R&D activities between challengers and incumbents. We find that an increase in the income gap positively impacts an econ-omy's growth rate, partly shifting R&D activities from challengers to incumbents. On the other hand, a greater income concentration is detrimental for growth, diminishing both the incumbents' and the challengers' R&D activities.

Keywords: Growth; Innovation; Income inequality (search for similar items in EconPapers)
Date: 2016-10
New Economics Papers: this item is included in nep-com, nep-gro, nep-ino and nep-sbm
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Working Paper: Beyond the Arrow effect: a Schumpeterian theory of multi-quality firms * (2016)
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