Market Power and the Incentive to Innovate: A Return to Schumpeter and Arrow

Tamara Todorova ()

MPRA Paper from University Library of Munich, Germany

Abstract: Using a simple linear demand and marginal cost function, we demonstrate that both competition and monopoly have incentives to innovate since this increases their profit levels. However, our results show that perfect competition is more motivated to innovate since the increase in the profit is greater with the same cost reduction and the same innovation. We also conclude that a more drastic innovation brings greater rent to the monopolist and reduces the advantages of perfect competition over monopoly. It could be presumed that monopoly firms would be attracted to more substantive innovations rather than non-drastic ones.

Keywords: competition; monopoly; innovation; profit (search for similar items in EconPapers)
JEL-codes: D41 D42 O31 O32 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-com, nep-cwa and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:108121

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