Dynamic pricing rule and R&D

This article models the intertemporal behaviour of a firm that sets product prices and simultaneously invests in R&D.

The model shows that the dynamic pricing rule follows the evolution of the production cost and is independent of the

evolution of the product quality. Thus, process innovation, which reduces production cost, is the main determinant of

a firm's pricing policy over time. Moreover, the firm invests more in process innovation over time at the expense of

product innovation. Hence, the model explains the decrease in the cost of production and in the price of technological

products throughout their life cycle.