The distribution of demand, market structure, and investment in technology

In a quality-ladder growth model, the dispersion in the demand for quality influences the prices innovators may charge for their innovations and the n umber of such firms that may obtain market shares at any one time. Under a more dispersed distribution, the innovator may only charge a lower price to cover the entire market. The payoff to innovation declines, causing invest ment to fall. When the dispersion has reached a critical level, the innovat or will no longer price out the incumbents, turning the market into a natur al oligopoly with firms selling different grades co-existing at any one tim e, even if it is optimal for all consumers to buy the highest grade availab le. Any further increases in dispersion raise the payoff to innovation, ind ucing greater investment.