A framework for non-drastic innovation with product differentiation

We model non-drastic technological innovation in a duopoly model with differentiated products. We derive profit functions for both firms which depend on only one variable, the technological gap. As our model derives product demands directly from agent utility we are able to fully describe the welfare effects of innovation. We show that the welfare improvements from innovation come not only as firms accrue higher profits, by charging consumers higher prices, but also as consumers enjoy higher quality products. The authors would like to thank participants of seminars at North Dakota State University, University of Manitoba, and Utah State University for many helpful comments. Special thanks to Bill Wilson and Scott Schaefer for conversations and comments that guided our thinking in this project. Citation: Jeremy Jay Jackson and Jason Smith, (2015) ''A framework for non-drastic innovation with product differentiation'', Economics Bulletin, Volume 35, Issue 1, pages 259-269 Contact: Jeremy Jay Jackson [email protected], Jason Smith [email protected]. Submitted: March 11, 2015. Published: March 11, 2015.