Spatial Competition In Quality, Demand- Induced Innovation, And Schumpeterian Growth
The authors develop a general equilibrium model of vertical innovation in which multiple firms compete monopolistically in the quality space. The model features many firms, each of which holds the monopoly to produce a unique quality level of an otherwise homogenous good, and consumers who are heterogeneous in their valuation of the good's quality. If the marginal cost of production is convex with respect to quality, multiple firms coexist, and their equilibrium markups are determined by the degree of convexity and the density of quality-competition. To endogenize the latter, they nest this industry setup in a Schumpeterian model of endogenous growth.