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Innovation by leaders

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  • Federico Etro

Abstract

A new rationale for the persistence of monopolies is based on a precommitment of the incumbent monopolist to invest in R&D. In a patent race, as long as entry is free, the Arrow effect disappears: the incumbent has more incentives to invest than any outsider. Paradoxically, a market with some persistence of monopoly is competitive, while one with continuous leapfrogging must hide some barriers to entry. When the size of innovations is endogenous, leaders invest in more radical innovations. If there is a sequence of innovations, cycling investment emerges. Finally, I apply the idea to a general equilibrium model of Schumpeterian growth with persistence of monopoly. Copyright 2004 Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 114 (2004)
Issue (Month): 495 (04)
Pages: 281-303

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Handle: RePEc:ecj:econjl:v:114:y:2004:i:495:p:281-303

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References

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  1. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
  2. Lee, Tom & Wilde, Louis L, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, MIT Press, vol. 94(2), pages 429-36, March.
  3. Loury, Glenn C, 1979. "Market Structure and Innovation," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 395-410, August.
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  5. Dixit, Avinash K, 1987. "Strategic Behavior in Contests," American Economic Review, American Economic Association, vol. 77(5), pages 891-98, December.
  6. Blundell, Richard & Griffith, Rachel & van Reenen, John, 1999. "Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 529-54, July.
  7. Zeira, Joseph, 2002. "Innovations, Patent Races, and Endogenous Growth," Working Paper Series rwp02-047, Harvard University, John F. Kennedy School of Government.
  8. Federico Etro, 2008. "Stackelberg Competition with Endogenous Entry," Economic Journal, Royal Economic Society, vol. 118(532), pages 1670-1697, October.
  9. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers 8904, University of Western Ontario, Department of Economics.
  10. Paul M Romer, 1999. "Endogenous Technological Change," Levine's Working Paper Archive 2135, David K. Levine.
  11. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
  12. Reinganum, Jennifer R., . "Innovation and Industry Evolution," Working Papers 426, California Institute of Technology, Division of the Humanities and Social Sciences.
  13. Peter Howitt, 2000. "Endogenous Growth and Cross-Country Income Differences," American Economic Review, American Economic Association, vol. 90(4), pages 829-846, September.
  14. Reinganum, Jennifer F., 1985. "A two-stage model of research and development with endogenous second-mover advantages," International Journal of Industrial Organization, Elsevier, vol. 3(3), pages 275-292, September.
  15. Kortum, Samuel, 1993. "Equilibrium R&D and the Patent-R&D Ratio: U.S. Evidence," American Economic Review, American Economic Association, vol. 83(2), pages 450-57, May.
  16. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  17. Cozzi Guido, 2007. "The Arrow Effect under Competitive R&D," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-20, January.
  18. Romer, Paul M, 1987. "Growth Based on Increasing Returns Due to Specialization," American Economic Review, American Economic Association, vol. 77(2), pages 56-62, May.
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