Long-Run Market Configurations in a Dynamic Quality-Ladder Model with Heterogeneity

Mario Samano and Marc Santugini

Cahiers de recherche from CIRPEE

Abstract: We study the long-run market configurations in a quality-ladder dynamic model. Specifically, we assume that the return to investment in quality differs across the firms. That is, for a given level of investment, one firm has a higher probability to raise the quality of the good it produces. We show that the model can generate five different types of long-run market configurations (market collapse, market collapse or monopoly, monopoly, duopoly and monopoly, and duopoly). A high degree of heterogeneity in the return to investment can mitigate the effect of highly reversible investments on the probability of market collapse, giving rise to non-negligible probabilities of observing a duopoly or even dominance of the firm with the lowest return to investment.

Keywords: Differentiated-good markets; Quality-ladder model; Heterogeneity; Dynamic investment (search for similar items in EconPapers)
JEL-codes: C61 C73 L13 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:1503

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