Markets with technological progress: pricing, quality, and novelty

Abstract

New and old products dier in two respects: quality and newness. Whereas a higher quality of a new product always benefits consumers, the newness itself benefits some consumers, but not others, and for some, it is even a disadvantage. We capture these features in a Hotelling model of OverLapping Innovators (HOLI model), entailing a sequence of static Hotelling games of horizontal product dierentiation (newness), that we extend by vertical product dierentiation (quality). In this model, the firms compete on quality and price. Using advanced dynamic hedonic regression methods, we empirically investigate the pricing policy of firms in the German laser printer market. We show that their pricing corresponds to our model with the entrant acting as the Stackelberg follower.