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CHAPTER 12 Modeling Technological Change We have so far investigated models of economic growth of exogenous or endogenous variety But economic growth has not resulted from technological change Either it has been exogenous, or it has been sustained because of a linear neoclassical technology, or it has taken place as a byproduct of knowledge spillovers Since our purpose is to understand the process of economic growth, models in which growth results from technological progress and technological change itself is a consequence of purposeful investments by firms and individuals are much more attractive These models not only endogenize technological progress, but they also relate the process of technological change to market structure, anti-trust and competition policy, and intellectual property rights policy They will also enable us to discuss issues of directed technical change In this chapter, we begin with a brief discussion of different conceptions of technological change and provide some foundations for the models that will come later 12.1 Different Conceptions of Technology 12.1.1 Types of Technological Change The literature on technological change often distinguishes between different types of innovations A first useful distinction is between process and product innovation While the latter refers to the introduction of a new product (for example, the introduction of the first DVD player), the former is concerned with innovations that reduce the costs of production of existing products (for example, the introduction of new machines to produce existing goods) A third type of innovation is perhaps the most common and involves the introduction of a higher-quality versions of an existing good The introduction of a better DVD player, when there are already DVD players in the market, would be an example of this third type of innovation In general, heterogeneous consumers 537