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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.

Suggested Citation

  • Federico Etro, 2004. "Innovation by leaders," Economic Journal, Royal Economic Society, vol. 114(495), pages 281-303, April.
  • Handle: RePEc:ecj:econjl:v:114:y:2004:i:495:p:281-303
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    References listed on IDEAS

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    1. Jennifer F. Reinganum, 1985. "Innovation and Industry Evolution," The Quarterly Journal of Economics, Oxford University Press, vol. 100(1), pages 81-99.
    2. Denicolo, Vincenzo, 2001. "Growth with non-drastic innovations and the persistence of leadership," European Economic Review, Elsevier, vol. 45(8), pages 1399-1413, August.
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    5. Federico Etro, 2008. "Stackelberg Competition with Endogenous Entry," Economic Journal, Royal Economic Society, vol. 118(532), pages 1670-1697, October.
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    14. Richard Blundell & Rachel Griffith & John van Reenen, 1999. "Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms," Review of Economic Studies, Oxford University Press, vol. 66(3), pages 529-554.
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