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Working Paper No. 04-04

Marketing Innovation
Yongmin Chen
February 2004

ABSTRACT

This paper provides an economic analysis of marketing innovation. Variants of a dynamic oligopoly model are developed to study two forms of marketing innovation: γ, which allows a firm to acquire consumer information effectively; and σ, which reduces consumer transaction costs. A firm's incentive to innovate depends on an invention effect and an imitation effect. It also depends on market structure and the nature of competition. The innovation incentive is higher for a large firm than for a small firm if imitation is sufficiently difficult, and otherwise the opposite is true. Increased competition reduces the value of γ but may increase the value of σ. Relative to the social optimum, the private incentive is too high for γ but too low for σ.

JEL classification: L1; M3

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