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An explanation for the inverted-U relationship between competition and innovation

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Abstract

The Dixit-Stiglitz model is extended by the possibility for rms to un- dertake process innovation. The model can provide a new explanation to describe the relationship that research activity of rms is positively corre- lated with product market competition at low levels of competition, and negatively at high levels that has been found in the data. The initial pos- itive relationship is caused by an increased business stealing opportunity with more competition, while the negative eect comes from the reduc- tion of the markup due to higher competition (measured as elasticity of substitution). Also the ambiguous relationship of market entry barriers with respect to research activity is discussed using a less general form of the model. This framework may also be used to explain the inverted-U relationship found between competition and advertising expenditures.

Suggested Citation

  • Ferdinand Rauch, 2008. "An explanation for the inverted-U relationship between competition and innovation," Vienna Economics Papers 0813, University of Vienna, Department of Economics.
  • Handle: RePEc:vie:viennp:0813
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    References listed on IDEAS

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    Cited by:

    1. Roberto Bonfatti & Luis A. Bryce Campodonico & Luigi Pisano, 2018. "Reconciling the Original Schumpeterian Model with the Observed Inverted-U Relationship between Competition and Innovation," CESifo Working Paper Series 6948, CESifo Group Munich.
    2. Roberto Bonfatti & Luis A. Bryce Campodonico & Luigi Pisano, 2018. "Reconciling the original Schumpeterian Model with the observed inverted-U relationship between competition and innovation," Discussion Papers 2018-03, University of Nottingham, GEP.
    3. Michael Polder & Erik Veldhuizen, 2012. "Innovation and Competition in the Netherlands: Testing the Inverted-U for Industries and Firms," Journal of Industry, Competition and Trade, Springer, vol. 12(1), pages 67-91, March.

    More about this item

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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