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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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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
Date of revision:
Handle: RePEc:usf:wpaper:0713
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  1. 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.
  2. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-46, August.
  3. Gale, D. & Chamley, C., 1992. "Information Revelation and Strategic Delay in a Model of Investment," Papers 10, Boston University - Department of Economics.
  4. Nicholas Bloom & John Van Reenen, 2002. "Patents, Real Options and Firm Performance," Economic Journal, Royal Economic Society, vol. 112(478), pages C97-C116, March.
  5. 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.
  6. Aghion, P. & Howitt, P., 1990. "A Model Of Growth Through Creative Destruction," DELTA Working Papers 90-12, DELTA (Ecole normale supérieure).
  7. Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1999. "Competition, financial discipline and growth," ULB Institutional Repository 2013/9619, ULB -- Universite Libre de Bruxelles.
  8. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
  9. 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.
  10. 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.
  11. 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.
  12. Godfrey Keller & Sven Rady & Martin Cripps, 2005. "Strategic Experimentation with Exponential Bandits," Econometrica, Econometric Society, vol. 73(1), pages 39-68, 01.
  13. Blundell, Richard & Griffith, Rachel & van Reenen, John, 1999. "Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 529-54, July.
  14. Sanghoon Ahn, 2002. "Competition, Innovation and Productivity Growth: A Review of Theory and Evidence," OECD Economics Department Working Papers 317, OECD Publishing.
  15. Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics 19772, University of Munich, Department of Economics.
  16. Dilip Abreu & Markus K. Brunnermeier, 2002. "Bubbles and crashes," LSE Research Online Documents on Economics 24905, London School of Economics and Political Science, LSE Library.
  17. Glenn C. Loury, 1976. "Market Structure and Innovation," Discussion Papers 256, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  18. repec:tpr:qjecon:v:90:y:1976:i:2:p:245-60 is not listed on IDEAS
  19. Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1997. "Corporate governance, competition policy and industrial policy," ULB Institutional Repository 2013/9613, ULB -- Universite Libre de Bruxelles.
  20. Jensen, Richard, 1982. "Adoption and diffusion of an innovation of uncertain profitability," Journal of Economic Theory, Elsevier, vol. 27(1), pages 182-193, June.
  21. Reinganum, Jennifer R., 1982. "Uncertain Innovation and the Persistence of Monopoly," Working Papers 431, California Institute of Technology, Division of the Humanities and Social Sciences.
  22. P.-L. Dubois & A. Jolibert, 2005. "Le marketing," Post-Print halshs-00095259, HAL.
  23. 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.
  24. Boone, Jan, 2001. "Intensity of competition and the incentive to innovate," International Journal of Industrial Organization, Elsevier, vol. 19(5), pages 705-726, April.
  25. Martin Stephen, 1993. "Endogenous Firm Efficiency in a Cournot Principal-Agent Model," Journal of Economic Theory, Elsevier, vol. 59(2), pages 445-450, April.
  26. Paul Geroski, 1995. "Innovation and Competitive Advantage," OECD Economics Department Working Papers 159, OECD Publishing.
  27. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  28. Wesley M. Cohen & Richard C. Levin & David C. Mowery, 1987. "Firm Size and R&D Intensity: A Re-Examination," NBER Working Papers 2205, National Bureau of Economic Research, Inc.
  29. Decamps, Jean-Paul & Mariotti, Thomas, 2004. "Investment timing and learning externalities," Journal of Economic Theory, Elsevier, vol. 118(1), pages 80-102, September.
  30. Aghion, Philippe & Howitt, Peter, 1996. " Research and Development in the Growth Process," Journal of Economic Growth, Springer, vol. 1(1), pages 49-73, March.
  31. 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.
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