Engel’s curve and product differentiation: A dynamic analysis of the effects of quality on consumer’s choice |
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Authors: | Vincenzo Merella |
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Institution: | (1) Department of Economics and Finance, Birkbeck College, University of London, London, United Kingdom;(2) Department of Economics, University of Cagliari, Cagliari, Italy |
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Abstract: | The application of Engel’s Curve in a single-product perspective may dramatically change the role of quality in affecting
the dynamics of economic performance. This paper introduces a specification of preferences that regards quality as luxury,
and quantity as necessary. The analysis is carried out by using a framework similar to Grossman’s and Helpman ’s (1991), while
quality is defined as in Stokey (1988). The resulting consumer’s demand crucially depends on quality. Quality is potentially
able to prevent the process, implied by neoclassical models, that leads the value of consumption goods to decline over time.
By doing so, quality also affects the consumption bundle shares and the variety-specific consumption growth rates, thus influencing
all dynamic quantitative variables of the economy.
I thank Professor Beniamino Moro for his guidance and encouragement. I thank Stephen Wright for his comments and suggestions.
I have benefited from the support of Alessio Moro, Dario Unali, Debora Fletcher, Emilio Merella, Esteban Jaimovich, Francesca
Lamanna, Matteo Bellinzas, Mauro Merella and all my friends. I am also indebted to Professor Cuong Le Van and Professor Stephen
Parente for their advice. I thank two anonymous Referees for their useful remarks. |
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Keywords: | consumption innovation quality |
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