Quality innovation: driving forces and implications for production, trade, and consumption

The dissertation has three main chapters on product quality innovation. First, we compare innovation effort and social welfare between monopoly, duopoly, and the social planner in a dynamic model with quality dependent on a continuous know-how stock. The technology frontier--the largest reachable know-how socks--does not always positively depend on competitiveness, i.e. a duopoly may technologically surpass the social planner. However, social welfare is always positively tied to competitiveness. Second, with a general equilibrium model, we derive a relative price function expressing productivity and quality effects, and develop a method for inferring relative quality changes. An application to services versus goods of the US from 1946-2006 provides evidence on aggregate quality changes and suggests us to incorporate quality variations when explaining relative prices. Third, we build a two-product model where productivity changes lead to reallocations of labor between quantity production and quality innovation. The correlation between relative productivity and relative quality is negative for low-range substitutability and positive for medium-range substitutability between two products. Looking at services versus goods of the US, the correlation is negative and productivity-driven quality can play a significant role in general quality development.