Competition, Innovation and Welfare
13 Pages Posted: 20 Oct 2011
Date Written: December 2011
In an economy with drastic innovation, we analyze the effects of product market competition on social welfare. Considering Cournot and Bertrand competition as different types of product market competition, we show that Cournot competition may generate higher social welfare depending on the difference between the pre‐ and post‐innovation costs of production and the magnitude of R&D productivities. In our analysis, R&D investments are higher under Bertrand (Cournot) competition if R&D productivities are sufficiently low (high).
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