Spatial Competition in Quality

45 Pages Posted: 30 May 2011 Last revised: 28 Nov 2011

See all articles by Philip U. Sauré

Philip U. Sauré

Johannes Gutenberg University Mainz - Gutenberg School of Management and Economics; CESifo (Center for Economic Studies and Ifo Institute)

Raphael Auer

Swiss National Bank; Bank for International Settlements (BIS)

Date Written: May 1, 2011

Abstract

We develop a model of vertical innovation in which firms incur a market entry cost and position themselves in the quality space. Once established, firms compete monopolistically in the quality space, selling to consumers with heterogeneous tastes for quality. Exogenously growing productivities induce firms to sequentially enter the market at the top end of the quality spectrum. We spell out the conditions under which the entry problem is replicated over time so that each new entrant improves incumbent qualities in fixed proportions. Sequential market entry overcomes the asymmetry of the location problem that unavoidably arises in the quality space: the quality spectrum has a top and a bottom end. Handling this asymmetry, a feature absent from the circular world of the related Lancaster (1966) model, is our main technical contribution. We embedded this model in a setup of Schumpeterian endogenous growth, yielding insights into the nature of "creative destruction" and the motives for innovation in vertically differentiated markets.

Suggested Citation

Sauré, Philip U. and Auer, Raphael, Spatial Competition in Quality (May 1, 2011). Available at SSRN: https://ssrn.com/abstract=1713309 or http://dx.doi.org/10.2139/ssrn.1713309

Philip U. Sauré (Contact Author)

Johannes Gutenberg University Mainz - Gutenberg School of Management and Economics ( email )

Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Raphael Auer

Swiss National Bank ( email )

Fraumuensterstr. 8
Zurich, 8022
Switzerland

Bank for International Settlements (BIS)

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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