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The road not taken: competition and the R&D portfolio

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  • Letina, Igor

Abstract

This paper develops an innovation model where firms choose which research paths to follow. Contrary to most of the literature which focuses only on the level of investment in innovation, this model captures both the variety of research paths undertaken and the amount of duplication of research. A characterization of the equilibrium market portfolio is provided. It is shown that an increase in the number of firms weakly increases the variety of developed projects and weakly increases the amount of duplication of research. An increase in the intensity of competition among firms leads to an increase in the variety of developed projects and a decrease in the amount of duplication of research. A characterization of the socially optimal portfolio is provided. It is shown under which conditions market suboptimally invests in the variety and duplication of research projects. Market underinvestment in the variety of R&D projects is demonstrated for a large class of homogeneous goods products.

Suggested Citation

  • Letina, Igor, 2013. "The road not taken: competition and the R&D portfolio," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79871, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc13:79871
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    References listed on IDEAS

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    1. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 701-728.
    2. Illoong Kwon, 2010. "R&D Portfolio and Market Structure," Economic Journal, Royal Economic Society, vol. 120(543), pages 313-323, March.
    3. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-293, June.
    4. Fershtman, Chaim & Rubinstein, Ariel, 1997. "A Simple Model of Equilibrium in Search Procedures," Journal of Economic Theory, Elsevier, vol. 72(2), pages 432-441, February.
    5. Raaj Kumar Sah & Joseph E. Stiglitz, 1987. "The Invariance of Market Innovation to the Number of Firms," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 98-108, Spring.
    6. Schmidt, Klaus M., 1996. "Managerial Incentives and Product Market Competition," CEPR Discussion Papers 1382, C.E.P.R. Discussion Papers.
    7. Philippe Aghion & Christopher Harris & Peter Howitt & John Vickers, 2001. "Competition, Imitation and Growth with Step-by-Step Innovation," Review of Economic Studies, Oxford University Press, vol. 68(3), pages 467-492.
    8. Kaylan Chatterjee & Robert Evans, 2004. "Rivals' Search for Buried Treasure: Competition and Duplication in R&D," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 160-183, Spring.
    9. Tandon, Pankaj, 1984. "Innovation, Market Structure, and Welfare," American Economic Review, American Economic Association, vol. 74(3), pages 394-403, June.
    10. Vania Sena, 2004. "The Return of the Prince of Denmark: A Survey on Recent Developments in the Economics of Innovation," Economic Journal, Royal Economic Society, vol. 114(496), pages 312-332, June.
    11. Reynolds, Stanley S & Isaac, R Mark, 1992. "Stochastic Innovation and Product Market Organization," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 2(4), pages 525-545, October.
    12. Tor Klette & David de Meza, 1986. "Is the Market Biased Against Risky R&D?," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 133-139, Spring.
    13. Klaus M. Schmidt, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 191-213.
    14. Herman C. Quirmbach, 1993. "R&D: Competition, Risk, and Performance," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 157-197, Summer.
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    Cited by:

    1. Jean-Michel Benkert & Igor Letina, 2016. "Designing dynamic research contests," ECON - Working Papers 235, Department of Economics - University of Zurich, revised Aug 2018.

    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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