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The Frequency and pricing of product innovations

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This paper constructs and analyzes an economic model of repeated product innovations in which the introduction of one product forms the base from which the development of the next product will start. The innovation process depends both on the flow of RandD expenditures and on the length of time over which they accrue. The products are durable, so although products become technologically obsolete due to the introduction of new and superior products, consumers need not replace the products they already possess. We determine rational expectations equilibria under the monopoly and the duopoly regimes, and use them to interpret a vast body of empirical literature which documents the frequency of innovations of various durable goods, changes in their quality adjusted prices, and how these variables vary in a cross section of products and over time. The model shows that the decentralized market equilibria are inefficient

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