TAILIEUCHUNG - Price Setting in an Innovative Market

Balanced and coordinated advances within these research areas will pave the way to meeting the 2020 vision target of a fivefold increase in renewable resource use. Figures 11A to 11D detail goals for these priority research areas. Cost of materials surfaced many times as a major issue during the steering group’s investigations. Lowering unit costs is critical for sustainable economic growth. Because the best products will be those with the greatest difference between value created and cost to produce, it is very important to understand the true costs and values of alternative chemical feedstocks. Clearly defining market value segments for different product types is also very valuable,. | Federal Reserve Bank of New York Staff Reports Price Setting in an Innovative Market Adam Copeland Adam Hale Shapiro Staff Report No. 462 July 2010 Revised March 2013 FRBNY REPORTS This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Bureau of Economic Analysis the . Department of Commerce the Federal Reserve Bank of New York the Federal Reserve Bank of San Francisco or the Federal Reserve System. Price Setting in an Innovative Market Adam Copeland and Adam Hale Shapiro Federal Reserve Bank of New York Staff Reports no. 462 July 2010 revised March 2013 JEL classification D40 L10 L63 O30 Abstract We examine how the confluence of competition and upstream innovation influences downstream firms profit-maximizing strategies. In particular we analyze how in light of these forces the downstream firm sets the price of the product over its life cycle. We focus on personal computers PCs and introduce two novel data sets that describe prices and sales in the industry. Our main result is that a vintage-capital model that combines a competitive market structure with a rapid rate of innovation is well able to explain the observed paths of prices as well as sales and consumer income over a typical PC s product cycle. The analysis implies that rapid price declines are not caused by upstream innovation alone but rather by the combination of upstream innovation and a competitive environment. Key words innovation market structure computers Copeland Federal Reserve Bank of New York e-mail . Shapiro Federal Reserve Bank of San Francisco e-mail . The authors thank Ana Aizcorbe Olivier Armantier Steve Berry Ron Borkovsky Ben Bridgman Ron Goettler Phil Haile Bronwyn Hall Kyle Hood David Mowery Matt Osborne Michael Ostrovsky

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