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A Theory of Competitive Industry Dynamics With Innovation and Imitation

  • Serguey Braguinsky

    (SUNY Buffalo)

  • Salavat Gabdrakhmanov

    (University of Chicago)

  • Atsushi Ohyama

    (SUNY Buffalo)

Empirical evidence on industry life-cycle reveals a pattern in which innovation rates remain fairly stable or are perhaps even higher at early stages, while patenting increases sharply as the industry matures. This increase in patenting in later stages is accompanied by net exit and lower rates of output growth and price decline. In this paper, we develop a dynamic model of a competitive industry with innovation and imitation that is consistent with these stylized facts. We derive an equilibrium growth path, along which leading firms invest in increasing the stock of technological knowledge and choose not to prevent imitation by other firms as long as the industry remains relatively small. As the industry expands including new entry, the leaders' optimal amount of investment gradually declines. We show that under some rather general conditions, there would exist a scale of the industry where innovating firms would choose to start preventing free imitation, bringing further expansion of the industry through new entry to a halt and causing net exit. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2007.03.003
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 10 (2007)
Issue (Month): 4 (October)
Pages: 729-760

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Handle: RePEc:red:issued:05-80
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  1. Jakob Klette & Samuel Kortum, 2002. "Innovating firms and aggregate innovation," Staff Report 300, Federal Reserve Bank of Minneapolis.
  2. Michele Boldrin, 2003. "Rent Seeking and Innovation," Theory workshop papers 658612000000000063, UCLA Department of Economics.
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  6. Nuvolari, A., 2004. "Collective invention during the British Industrial Revolution: the case of the Cornish pumping engine," Working Papers 04.02, Eindhoven Center for Innovation Studies.
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  8. Gort, Michael & Klepper, Steven, 1982. "Time Paths in the Diffusion of Product Innovations," Economic Journal, Royal Economic Society, vol. 92(367), pages 630-53, September.
  9. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  10. Agarwal, Rajshree, 1998. "Evolutionary trends of industry variables," International Journal of Industrial Organization, Elsevier, vol. 16(4), pages 511-525, July.
  11. Kyriazidou, Ekaterini & Pesendorfer, Martin, 1999. "Viennese Chairs: A Case Study for Modern Industrialization," The Journal of Economic History, Cambridge University Press, vol. 59(01), pages 143-166, March.
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