Market power, cost reduction and consumer search

This paper reconciles two opposing views in the R&D and agency literatures about how market power influences incentives to reduce costs. I develop a m odel, where consumers search for prices, firms set prices, and technology i s determined endogenously through stochastic investment, to show that the r elation between market power and cost reduction depends on the context. I s how that shifts in different parameters induce market power and investment to vary in different ways. This view is supported by the ambiguity of the c onclusions of the empirical literature on the determinants of R&D and produ ctivity growth. (C) 2001 Elsevier Science B.V. All rights reserved.