Too Much R&D? Vertical Differentiation in a Model of Monopolistic Competition

Abstract

This paper discusses a model of vertical and horizontal product differentiation within the Dixit-Stiglitz framework of monopolistic competition. Firms do not only compete in prices and horizontal attributes of their products, but also in the quality that can be controlled by R&D activities. Based upon the results of a general equilibrium model, intra-sectoral trade and the welfare implications of public intervention in terms of research promotion are considered. The analysis is completed by a numerical application to ten basic European industries.