Innovation, Market Structure, and Welfare: A Stackelberg Model

Abstract

A Stackelberg model of production with process innovations is introduced. The leader invests in R&D; followers conduct no R&D but are able to benefit from the leader's research. It is found that the leader invests less in R&D as the fringe expands or as spillovers from research increase. The output and R&D of the Stackelberg industry fall short of the social optimum. When the Stackelberg leader is more efficient than the fringe, a few firms generate more social welfare than a large number of firms under high technological opportunity. As the technological opportunity diminishes, the welfare differences between market structures are reduced. The findings of this article lend support to the Schumpeterian hypothesis.