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Information Acquisition and Innovation under Competitive Pressure

  • Andrei Barbos

    ()

    (Department of Economics, University of South Florida)

This paper studies information acquisition under competitive pressure and proposes a model to examine the relationship between product market competition and the level of innovative ac- tivity in an industry. Our paper offers theoretical support for recent empirical results that point to an inverted-U shape relationship between competition and innovation. The model presents an optimal timing decision problem where a firm endowed with an idea trades the benefits of waiting for additional information on whether this idea can be converted into a successful project against the cost of delaying innovation: a given firm's profit following innovation is decreasing in the number of firms that invested at earlier dates. By recognizing that a firm can intensify its innovative activity on two dimensions, a risk dimension and a quantitative dimension, we show that firms solve this trade-off precisely so as to generate the inverted-U shape relationship.

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File URL: https://docs.google.com/file/d/0B0DaoNloCZvkWVRxVjQtNDhRS1c2SlZtOVVqVWRVQQ/edit?usp=drive_web&pli=1
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Paper provided by University of South Florida, Department of Economics in its series Working Papers with number 0713.

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Length: 25 pages
Date of creation: Jan 2013
Handle: RePEc:usf:wpaper:0713
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  7. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1999. "Competition, Financial Discipline and Growth," CEPR Discussion Papers 2128, C.E.P.R. Discussion Papers.
  8. Howitt, Peter & Griffith, Rachel & Aghion, Philippe & Blundell, Richard & Bloom, Nick, 2005. "Competition and Innovation: An Inverted-U Relationship," Scholarly Articles 4481507, Harvard University Department of Economics.
  9. Aghion, Philippe & Harris, Christopher & Vickers, John, 1997. "Competition and growth with step-by-step innovation: An example," European Economic Review, Elsevier, vol. 41(3-5), pages 771-782, April.
  10. P.-L. Dubois & A. Jolibert, 2005. "Le marketing," Post-Print halshs-00095259, HAL.
  11. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
  12. John Bound & Clint Cummins & Zvi Griliches & Bronwyn H. Hall & Adam B. Jaffe, 1984. "Who Does R&D and Who Patents?," NBER Chapters, in: R&D, Patents, and Productivity, pages 21-54 National Bureau of Economic Research, Inc.
  13. Boone, J., 2000. "Competitive pressure : The effects on investments in product and process innovation," Other publications TiSEM 88418185-7603-4c36-92fd-3, Tilburg University, School of Economics and Management.
  14. Gale, D. & Chamley, C., 1992. "Information Revelation and Strategic Delay in a Model of Investment," Papers 10, Boston University - Department of Economics.
  15. Schmidt, Klaus M., 1996. "Managerial Incentives and Product Market Competition," CEPR Discussion Papers 1382, C.E.P.R. Discussion Papers.
  16. Decamps, Jean-Paul & Mariotti, Thomas, 2004. "Investment timing and learning externalities," Journal of Economic Theory, Elsevier, vol. 118(1), pages 80-102, September.
  17. Glenn C. Loury, 1976. "Market Structure and Innovation," Discussion Papers 256, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  18. Stephen Nickell, 1993. "Competition and Corporate Performance," CEP Discussion Papers dp0182, Centre for Economic Performance, LSE.
  19. Morton I. Kamien & Nancy L. Schwartz, 1976. "On the Degree of Rivalry for Maximum Innovative Activity," The Quarterly Journal of Economics, Oxford University Press, vol. 90(2), pages 245-260.
  20. William Comanor & F. M. Scherer, 1995. "Rewriting History: the Early Sherman Act Monopolization Cases," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 2(2), pages 263-290.
  21. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
  22. Klaus M. Schmidt, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 191-213.
  23. Paul Geroski, 1995. "Innovation and Competitive Advantage," OECD Economics Department Working Papers 159, OECD Publishing.
  24. Jensen, Richard, 1982. "Adoption and diffusion of an innovation of uncertain profitability," Journal of Economic Theory, Elsevier, vol. 27(1), pages 182-193, June.
  25. Nicholas Bloom & John Van Reenen, 2002. "Patents, Real Options and Firm Performance," Economic Journal, Royal Economic Society, vol. 112(478), pages C97-C116, March.
  26. Boone, Jan, 2001. "Intensity of competition and the incentive to innovate," International Journal of Industrial Organization, Elsevier, vol. 19(5), pages 705-726, April.
  27. Aghion, Philippe & Howitt, Peter, 1996. "Research and Development in the Growth Process," Journal of Economic Growth, Springer, vol. 1(1), pages 49-73, March.
  28. 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.
  29. Martin Stephen, 1993. "Endogenous Firm Efficiency in a Cournot Principal-Agent Model," Journal of Economic Theory, Elsevier, vol. 59(2), pages 445-450, April.
  30. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  31. Jan Boone, 2008. "Competition: Theoretical Parameterizations and Empirical Measures," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(4), pages 587-611, December.
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