Waves of Creative Destruction: Customer Bases and the Dynamics of Innovation

44 Pages Posted: 25 Sep 1999 Last revised: 24 Oct 2014

See all articles by Jeremy C. Stein

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 1994

Abstract

This paper develops a model of repeated innovation with knowledge spillovers. The model's novel feature is that firms compete on two dimensions: 1) product quality or cost, where one firm's innovation ultimately spills over to other firms; and 2) distribution costs, where there are no spillovers across firms and where incumbent firms' existing customer bases give them a competitive advantage over would- be entrants. Customer bases have two important consequences: 1) they can in some circumstances dramatically reduce the long-run average level of innovation; 2) they lead to endogenous bunching, or waves, in innovative activity.

Suggested Citation

Stein, Jeremy C., Waves of Creative Destruction: Customer Bases and the Dynamics of Innovation (June 1994). NBER Working Paper No. w4782. Available at SSRN: https://ssrn.com/abstract=6039

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