"Competition and Product Innovation in Dynamic Oligopoly"
Working paper,
January
2012
Publication type: Working paper
Research Archive Topic: Business Economics and Public Policy, Marketing, Media and Technology, Strategy
Abstract
We investigate the relationship between competition and innovation using a dynamic oligopoly model that endogenizes both the long-run innovation rate and market structure. Determinants of competition, such as product substitutability, entry costs, and innovation spillovers, aff ect fi rms' equilibrium strategies for entry, exit, and R&D. We fi nd an inverted-U relationship between product substitutability and innovation: the returns to innovation initially rise for all firms but eventually, as the market approaches a winner-take-all environment, laggards have few pro fit scraps to fight over and give up pursuit of the leader, knowing he will defend his lead. We also fi nd competitive forces interact with each other: innovation exhibits a positive relationship with spillovers when product substitutability is high but is unaff ected by the spillover when substitutability is low. Entry costs and innovation exhibit a U-shaped relationship that results from entry-deterring R&D by laggards.
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