We create a general equilibrium model of vertical innovation where we introduce heterogeneity in consumers via differences in willingness to pay. This permits the analysis of two cases: a regime where the leading-quality firm sells to the whole market (the pooling case) and a regime where the top-quality firm sells to the High-valuation group while the second-best firm sells to the Low-valuation group (the separating case).
This setup allows us to conclude that, at equilibrium, more than one quality and at most the two best qualities can be produced and sold.
We then analyze the effect of the existence of two groups of consumers with different valuation for a quality good on the behavior of the firm and on the innovation rate of the economy. We conclude that such disparities in willingnesses to pay enhance innovation.
A comparative statics analysis shows that both the willingness to pay parameter and the share parameter of the High-valuation group tend to positively influence the innovation rate of the economy whereas it has an ambiguous effect on the aggregate spending.
Finally, we investigate the issue of optimal innovation rate and find ourselves unable to conclude on the most suited policy to adopt.
|la date de réponse||2011|