Title: New Product Introduction and Diffusion with Costly Search
Reference Number: 1058
Publication Date: April 2003
JEL Classifcation: L10, L11, O31, D40

Chung Yi Tse
The University of Hong Kong

How may the low search cost in the new economy affect innovation and new product introduction? The usual model of product market search suggests that a low search cost can turn out to be detrimental to innovation and new product introduction as the low search cost erodes firms' market power, attenuating the profit from innovation. This usual model, however, misses the important dimension of product market search that how often it pays to search depends on the pace at which new products are introduced. This paper studies a model of monopolistic competition with costly search, where the point of departure is that of a fixed cost of a shopping trip. With this fixed cost, the optimal frequency of search is tied to the pace at which new products are introduced. In this environment, a low search cost could turn out to be favorable to innovation. At a low search cost, consumers search more often, speeding up the diffusion of new products and possibly resulting in higher profits for firms, despite the erosion of market power.

Published in Journal of Economic Dynamics and Control 30:12 (2006), pp. 2775-2792.

Key words: product market search, innovation, new product introduction

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Last modified: 01/24/2007