Product Innovation Incentives: Monopoly vs. Competition
AbstractArrow (1962) showed that a secure monopolist (unconcerned with preemption) has a weaker incentive than would a competitive firm to invest in a patentable process innovation. This paper shows that the ranking can be reversed for product innovations. Only the innovator sells the new product, a differentiated substitute for the old. Under alternative market structures considered, the old product is sold only by that same firm (two-product monopoly), only by a different firm (post-innovation duopoly), or in perfect competition. In an asymmetric Hotelling model, the innovation incentive under monopoly is greater than under duopoly if and only if the new product has the higher quality, and is always greater than under perfect competition. Classification-JEL Codes: D4, L1
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Bibliographic InfoPaper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~09-09-02.
Date of creation: 02 Apr 2009
Date of revision:
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Postal: Georgetown University Department of Economics Washington, DC 20057-1036
Web page: http://econ.georgetown.edu/
Postal: Marcia Suss Administrative Officer Georgetown University Department of Economics Washington, DC 20057-1036
Find related papers by JEL classification:
- D4 - Microeconomics - - Market Structure and Pricing
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-04-25 (All new papers)
- NEP-BEC-2009-04-25 (Business Economics)
- NEP-COM-2009-04-25 (Industrial Competition)
- NEP-CSE-2009-04-25 (Economics of Strategic Management)
- NEP-ENT-2009-04-25 (Entrepreneurship)
- NEP-INO-2009-04-25 (Innovation)
- NEP-MIC-2009-04-25 (Microeconomics)
- NEP-TID-2009-04-25 (Technology & Industrial Dynamics)
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- Schmutzler, Armin, 2009. "The Relation Between Competition and Investment â€“ Towards a Synthesis," Department of Economics, Working Paper Series qt8tt4457m, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Schmutzler, Armin, 2010.
"The relation between competition and innovation -- Why is it such a mess?,"
CEPR Discussion Papers
7640, C.E.P.R. Discussion Papers.
- Armin Schmutzler, 2007. "The relation between competition and innovation – Why is it such a mess?," Working Papers 0716, University of Zurich, Socioeconomic Institute, revised Jan 2010.
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