Competition Among Entrepreneurs

Abstract

I examine a three-stage model of Schumpeterian competition among entrepreneurs. In the initial entry stage, entrepreneurs invest in innovation and establish firms. In the next stage, entrepreneurs choose prices strategically, make irreversible investments, and compete to serve consumers, while faced with asymmetric information about each others’ innovations. In the final creative destruction stage, firms with better technologies remain in the market while firms with inferior technologies exit the market. The model features strategic pricing by firms and the possibility of heterogeneous technologies remaining in the market. The model provides a necessary and sufficient condition for creative destruction.