Heterogeneous Consumers, Vertical Product Differentiation and the Rate of Innovation

Abstract

This paper studies the impact of income inequality on the level of innovative activities in a model where innovations result in quality improvements. The market for quality goods is characterized by a natural oligopoly with three types of consumers - rich, middle class and poor. In general, we find that for reasons of strategic price setting a more equal distribution of income is favourable for innovation incentives. This is consistent with empirical evidence suggesting that countries with a more equal distribution of income have grown faster.Inequality, Income Distribution, Heterogeneity, Innovation, Endogeneous Growth, Product Quality, Vertical Product Differentiation