Oligopoly and Quality Leapfrogging

The recent extensive study of vertical product differentiation models has allowed for the analysis of international trade issues in the presence of country asymmetries in terms of product qualities, technology, costs, market size and income. In the presence of such asymmetries, national industries will either be market leaders or be lagging behind in the international marketplace in terms of their product qualities. The resulting asymmetry in profits creates powerful incentives for lagging industries as well as their national governments to reverse this situation to their advantage, i.e. to induce "Leapfrogging" in terms of product qualities. This paper presents an overview of exisitng research on vertical product differentiation and Leapfrogging as well as several new results and questions