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 model, where consumers search for prices, firms set prices, and technology is determined endogenously through stochastic investment, to show that the relation between market power and cost reduction depends on the context. I show that shifts in different parameters induce market power and investment to vary in different ways. This view is supported by the ambiguity of the conclusions of the empirical literature on the determinants of R&D and productivity growth.