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On the Relationship between Competition and Innovation in a Duopoly with a Single Innovator

  • You-hua Chen

    ()

    (South China Agricultural University)

  • Pu-yan Nie

    ()

    (Jinan University)

  • X. Henry Wang

    ()

    (University of Missouri-Columbia)

This paper studies the incentive by a single firm in a differentiated goods duopoly to engage in cost-reducing innovations and how this incentive is affected by the level of competition in the product market. It is found that a firm's innovation effort has a U-shaped relationship with the level of competition. This result generally holds true for both the initially more efficient firm and the initially less efficient firm and in both the open loop model and the closed loop model. Consumers always benefit from innovations and fare the best when the initially more efficient firm is the innovator.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 33 (2013)
Issue (Month): 4 ()
Pages: 2648-2660

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Handle: RePEc:ebl:ecbull:eb-13-00366
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  1. Yongmin Chen & Marius Schwartz, 2013. "Product Innovation Incentives: Monopoly vs. Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(3), pages 513-528, 09.
  2. Tang, Jianmin, 2006. "Competition and innovation behaviour," Research Policy, Elsevier, vol. 35(1), pages 68-82, February.
  3. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-26, June.
  4. Dixit, Avinash K., 1978. "A Model of Duopoly Suggesting a Theory of Entry Barriers," The Warwick Economics Research Paper Series (TWERPS) 125, University of Warwick, Department of Economics.
  5. Demsetz, Harold, 1969. "Information and Efficiency: Another Viewpoint," Journal of Law and Economics, University of Chicago Press, vol. 12(1), pages 1-22, April.
  6. Sacco, Dario & Schmutzler, Armin, 2011. "Is there a U-shaped relation between competition and investment?," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 65-73, January.
  7. Yi, Sang-Seung, 1999. "Market structure and incentives to innovate: the case of Cournot oligopoly," Economics Letters, Elsevier, vol. 65(3), pages 379-388, December.
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