Abstract
This paper analyzes the two stage quality model with un-served consumers. It is well known that the model is difficult to solve. One of the main consequences of this is that comparative static exercises are rarely carried out in the model. We show that by taking quality in the relative sense not only can the model be fully solved; comparative static exercises can be performed as well through simulation. We use the comparative static results to show that in a North – South framework, catching up by the South results in enhanced welfare for the South as well as aggregate world welfare even though the welfare for the North falls.
“China (is going) from imitation to innovation”—China daily, 24 April 2010.
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Notes
- 1.
For a different model specification (see footnote 3) an exercise similar to what we have done here has been done by Acharyya and Bandyopadhyay (2004).
- 2.
Note this is not the only utility function that has been used to model quality. For instance Mussa and Rosen (1978) uses an utility function defined over the ith consumer where γ is discrete and is interpreted as the marginal utility of quality for the ith consumer rather than his income.
- 3.
Motta (1993) and others have considered positive costs however they have not attempted to evaluate the effects of innovation in their exercises.
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Bhattacharyya, R., Mukherjee, M. (2014). Catching Up in Terms of Product Quality. In: Acharyya, R., Marjit, S. (eds) Trade, Globalization and Development. Springer, India. https://doi.org/10.1007/978-81-322-1151-8_9
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