Product Cycles and Market Penetration

TLDR

Consumer willingness to pay varies by quality, so lower‑quality products sell more widely. The study builds a quality‑ladders product‑cycle model that incorporates multiple quality tiers. The authors construct a theoretical model that maps product quality levels onto market penetration dynamics. The model shows that Southern firms penetrate high‑technology markets more deeply when they have expanded resources or weaker IP protection, which in turn reduces North‑side wages and innovation rates. © 1997 Economics Department, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association.

Abstract

This paper constructs a quality ladders product cycle model with multiple quality levels. A lower quality level of each product sells due to differences in willingness to pay for quality across consumers. The model determines how far Southern firms penetrate high-technology product markets. Expanded resources or weakened protection of intellectual property rights in the South relative to the North lead to increased Southern market penetration as observed with East Asian countries. Either cause of increased Southern market penetration implies a reduction in the wage in the North relative to the South and a reduction in the rate of innovation. Copyright 1997 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.