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A Theory of Innovation and Its Effects

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  • Lester G. Telser

Abstract

The theory of optimal sequential search is used to study an industry where firms make homogeneous products and seek lower costs of production. Research outlays correspond to the cost of search. The research results are regarded as drawings from a probability distribution that depends on the research outlays. Eventually, the production costs are so low, continuing the research no longer pays, the research era ends, and the mature era begins. Sequential research results in a cost level at the end of the research era and beginning of the mature era that is lower, the smaller the number of firms then in the industry. Firm market share and rate of return are positively related. The firm with the largest share during the research era retains its lead throughout, and its share tends to fall at a rate that is slower, the larger its share initially.

Suggested Citation

  • Lester G. Telser, 1982. "A Theory of Innovation and Its Effects," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 69-92, Spring.
  • Handle: RePEc:rje:bellje:v:13:y:1982:i:spring:p:69-92
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    Cited by:

    1. Sherwin Rosen, 1984. "The Distribution of Prizes in a Match-Play Tournament with Single Eliminations," NBER Working Papers 1516, National Bureau of Economic Research, Inc.
    2. Paroma Sanyal, 2005. "Peanut Butter Patents Versus the New Economy: Does the Increased Rate of Patenting Signal More Invention or Just Lower Standards?," Industrial Organization 0504013, EconWPA.
    3. Pakes, Ariel, 1985. "On Patents, R&D, and the Stock Market Rate of Return," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 390-409, April.
    4. Pakes, Ariel S, 1986. "Patents as Options: Some Estimates of the Value of Holding European Patent Stocks," Econometrica, Econometric Society, vol. 54(4), pages 755-784, July.
    5. Leonard Cheng, 1984. "International trade and technology: A brief survey of the recent literature," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 120(1), pages 165-189, March.
    6. Shirish D. Chikte & Sudhakar D. Deshmukh, 1993. "To be The First or to be The Best: New Product Quality and Timing in R&D Competition," Discussion Papers 1056, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    7. Edward P. Lazear, 1983. "Raids and Imitation," NBER Working Papers 1158, National Bureau of Economic Research, Inc.

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