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Competition and product innovation in dynamic oligopoly

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  • Ronald Goettler

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  • Brett Gordon

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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. We use the model to examine how various determinants of competition, such as product substitutability, entry costs, and innovation spillovers, affect firms’ equilibrium strategies for entry, exit, and investment in product quality. We find 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 residual profits to fight over and give up pursuit of the leader, knowing he will defend his lead. The increasing portion of the inverted-U reflects changes in firm’s investment policy functions, whereas the decreasing portion arises from the industry transiting to states with fewer firms and wider quality gaps. Allowing market structure to be endogenous yields different results compared to extant work that fixes or exogenously varies the market structure. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Ronald Goettler & Brett Gordon, 2014. "Competition and product innovation in dynamic oligopoly," Quantitative Marketing and Economics (QME), Springer, vol. 12(1), pages 1-42, March.
  • Handle: RePEc:kap:qmktec:v:12:y:2014:i:1:p:1-42
    DOI: 10.1007/s11129-013-9142-2
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    2. Stiglitz, Joseph E., 2015. "Leaders and followers: Perspectives on the Nordic model and the economics of innovation," Journal of Public Economics, Elsevier, vol. 127(C), pages 3-16.
    3. Dhanora, Madan & Sharma, Ruchi & Khachoo, Qayoom, 2018. "Non-linear impact of product and process innovations on market power: A theoretical and empirical investigation," Economic Modelling, Elsevier, vol. 70(C), pages 67-77.
    4. Goldin, Ian & Koutroumpis, Pantelis & Lafond, François & Winkler, Julian, 2020. "Why is productivity slowing down?," MPRA Paper 99172, University Library of Munich, Germany.
    5. Ghosh, Arghya & Kato, Takao & Morita, Hodaka, 2017. "Incremental innovation and competitive pressure in the presence of discrete innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 135(C), pages 1-14.
    6. Ben Dkhil, Inès, 2014. "Regulation and Investment in Telecom Network Infrastructure Facilities: The Recent Developments and Debates," MPRA Paper 72910, University Library of Munich, Germany, revised 02 Feb 2015.
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    8. Linli Xu & Jorge M. Silva-Risso & Kenneth C. Wilbur, 2018. "Dynamic Quality Ladder Model Predictions in Nonrandom Holdout Samples," Management Science, INFORMS, vol. 64(7), pages 3187-3207, July.
    9. Samano, Mario & Santugini, Marc, 2020. "Long-run market configurations in a dynamic quality-ladder model with externalities," Journal of Economic Dynamics and Control, Elsevier, vol. 117(C).
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    13. Debadutta K. Panda, 2019. "Competitive dynamics in not-for-profit organizations: evidence from India," Asia Pacific Journal of Management, Springer, vol. 36(4), pages 1251-1274, December.
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    More about this item

    Keywords

    Competition and innovation; R&D; Dynamic oligopoly; Inverted-U; Spillovers; C73; D43; L11; L13; L40;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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