ENDOGENOUS PRODUCT CYCLES

This paper builds upon the authors' earlier work on product development and international trade to construct a model of the product cycle featuring endogenous innovation and endogenous technology transfer. In this model, competitive entrepreneurs in the North expend resources to bring out new products whenever the expected present discounted value of subsequent oligopoly profits exceeds current product development costs. Each Northern oligopolist continuously faces the risk that its product will be copied by a Southern imitator, at which time its profit stream comes to an end. Thus, the length of the initial phase in the life cycle of each product is random. In the South, entrepreneurs may devote resources to learning the production processes that have been developed in the North. There too, costs (of reverse engineering) must be covered by a subsequent stream of operating profits. The authors analyse the long-run effects of subsidies to innovation in the North, of subsidies to reverse engineering (or learning) in the South, and of trade policies in both regions. -from Authors