Essays on development costs, development complexity, market structure, and product quality

This dissertation consists of three essays. The first two essays study the impact of development costs and the complexity of the development process on market structure. The first essay examines the case of information goods, and the second essay studies the case of hybrid goods. The third essay explores the implications of the results of the first two essays for market concentration, product quality, and public policy.; The first essay examines markets for information goods and finds that they differ significantly from markets for traditional goods. A multiproduct monopoly chooses to offer a single product, which is of considerably lower quality than the efficient product. Even in the absence of demand-side (network) externalities, information goods generate returns that are a convex increasing function of the market size. Markets for information goods are characterized by significant quality differentials, with the highest-quality firm behaving almost like a monopoly. Markets for information goods tend to be dominated by the highest-quality firm, even with free entry. These results are sensitive to the structure of the development cost function: the extent to which the highest-quality firm dominates the market and the quality distortion are decreasing functions of the complexity of the development process.; In the second essay, we define an index that specifies where a particular good falls on the spectrum from pure industrial goods, which have no development costs, to pure information goods, which have zero unit costs. We show that the market outcomes are driven by this index. As development costs become increasingly important, the quality distortion of a product offered by a monopoly increases, and the degree to which the higher-quality firm in a duopoly dominates the market increases. While free entry leads to the competitive outcome for pure industrial goods, the market outcome increasingly resembles that of a monopoly as development costs become more and more important. In addition, all of these trends are a decreasing function of the complexity of the development process.; In the third essay, we explore the implications of these results for market concentration, product quality, and public policy.