Quality competition, market structure and endogenous growth

Abstract

This paper studies the role of quality competition in endogenous growth and institutional factors which can affect growth through affecting quality competition. The R&D-based growth literature as it stands attributes the incentives for innovations to monopolist market structure, and regards the driving force of growth being 'the rent-pull'. This paper presents a 'competition-push' theory of growth by considering an environment where firms can coexist and compete in quality within the same markets. Quality competition takes the form of vertical product differentiation or cost-reducing process innovation, which requires endogenous fixed R&D costs. Due to the nonrival and excludable features of 'quality' and consequent nonconvexity, market concentration naturally occurs in a manner such that R&D intensity and market structure are determined simultaneously in equilibrium. The main conclusions are that quality competition suffices to provide incentives for innovation at industry level, and through knowledge spillovers it also drives aggregate technical progress, that institutional restriction on free entry into quality competition may be desirable to some degree, but monopolization is usually not optimal, that credit constraint which limits quality competition is detrimental to growth