The Relation between Competition and Innovation -- Why is it Such a Mess?

39 Pages Posted: 20 Jan 2010

See all articles by Armin Schmutzler

Armin Schmutzler

University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: January 2010

Abstract

Using a general two-stage framework, this paper gives sufficient conditions for increasing competition to have negative or positive effects on R&D-investment, respectively. Both possibilities arise in plausible situations, even if one uses relatively narrow definitions of increasing competition. The paper also shows that competition is more likely to increase the investments of leaders than those of laggards. When R&D-spillovers are strong, competition is less likely to increase investments. The paper also identifies conditions under which low initial levels of competition make a positive effects of competition on investment more likely. Extending the basic framework, the paper shows that separation of ownership and control, endogenous entry and cumulative investments make positive effects of competition on investment more likely. Imperfect upstream competition weakens the effects of competition on investment.

Keywords: competition, cost reduction, investment

JEL Classification: L13, L20, L22

Suggested Citation

Schmutzler, Armin, The Relation between Competition and Innovation -- Why is it Such a Mess? (January 2010). CEPR Discussion Paper No. DP7640. Available at SSRN: https://ssrn.com/abstract=1539312

Armin Schmutzler (Contact Author)

University of Zurich - Department of Economics ( email )

Zürich, CH-8006
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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