Competition and Product Innovation in Dynamic Oligopoly
Ronald L. Goettler
University of Rochester - Simon School of Business
Brett R. Gordon
Columbia Business School
April 17, 2013
We investigate the relationship between competition and innovation using a dynamic oligopoly model that endogenizes both the long-run innovation rate and market structure. We use the model to examine how various determinants of competition, such as product substitutability, entry costs, and innovation spillovers, affect firms' equilibrium strategies for entry, exit, and investment in product quality. We find an inverted-U relationship between product substitutability and innovation: the returns to innovation initially rise for all firms but eventually, as the market approaches a winner-take-all environment, laggards have few profit scraps to fight over and give up pursuit of the leader, knowing he will defend his lead. The increasing portion of the inverted-U reflects changes in firm's investment policy functions, whereas the decreasing portion arises from the industry transiting to states with fewer firms and wider quality gaps. Allowing market structure to be endogenous yields different results compared to extant work that fixes the market structure.
Number of Pages in PDF File: 42
Keywords: competition and innovation, R&D, innovation, dynamic oligopoly, inverted-U, spillovers, state space bounds
JEL Classification: C73, D43, L11, L13, L40working papers series
Date posted: October 17, 2011 ; Last revised: April 18, 2013
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.640 seconds