Coevolution of product quality and consumer preferences

Abstract

This paper seeks to analyze the self-reinforcing coevolutionary process of innovation on the basis of the framework of evolutionary ecology and population genetics. Particularly central to this analysis is “Fisher’s runaway process,” which explains the coevolution of product quality and consumer preference in the supply–demand context. This paper puts forward the following main points. First, we can conclude from a matching model of supply and demand that when a consumer who prefers high-quality products discovers such a product in the market, he/she will certainly purchase that product. Second, taking into account both the high survival rate of a firm that supplies a high-quality product and the cost incurred by the firm in improving product quality, we arrive at an evolutionarily stable Fisher’s process. The third point, however, considers the disutility of a consumer with an inordinately high quality preference; in this case, Fisher’s process disappears. Fourth, it is possible to recover Fisher’s process if we consider the existence of power users or the effect of the negative bias of innovation.