Abstract
In order highlight the non-steady state and real world dynamics associated with competitive innovation we develop a model involving choice of product quality in a simple duopoly characterised by two key departures from the dominant framework of quality ladder: first, we consider firms who refrain from maximising short-run profits. Instead, firms are started their function or action by their long-run goal of survival and growth. Secondly, we introduce the full-cost pricing model as opposed to market clearing prices. Based on these two key features we are able to derive the dynamics that can characterise the evolution of product quality in the non-steady state. We establish that the presence of an unstable equilibrium creates a threshold effect, which can also give rise to either a virtuous or vicious, path of quality choices. We further show that the quality dynamics can exhibit chaotic behaviour. As a consequence, firms become unsuccessful to see systematic errors. Firms also become unsuccessful to make long-run predictions with certainty even though they act in a deterministic world. The corollary is that time profiles will separate exponentially and these time profiles begin very close together. We offer interesting simulations to support the theoretical findings.
Highlights
High-tech products have, in recent years, assumed paramount significance in the prosperity of nations
The finding has important implications: the deductive equilibrium approach to modern economic theory typically assume that all systematic prediction errors are dispelled by the Nash equilibrium, and the economic system settles in an equilibrium characterised by self-confirming and mutual-best responses
The deductive equilibrium analysis may have contributed to the understanding of modern industrial economics
Summary
High-tech products have, in recent years, assumed paramount significance in the prosperity of nations. For more than seven decades, since it was first advanced in Schumpeter (1942), the standard model has been the primary tool in order to explain the dependence of technology progresses on economic fundamentals such as patience and cost (Boldrin & Levin, 2009). Once the value falls far enough, it becomes profitable for firms to introduce a new idea to cover the fixed cost of adopting the new idea Both the traditional Schumpeterian theory of innovation and the subsequent developments by Boldrin and Levin (2008, 2009) are rooted in the steady state of the postulated dynamics of innovation. The main justification for using the equilibrium analysis can pivot on the simple fulcrum that industrial economics does not address exploding time paths of any significant industrial variable This justification is incorrect once one considers the possibility of introducing chaotic dynamics in the literature.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
