Competition and Innovation in Markets with Technology Leaders

Ku-Chu Tsao, Arijit Mukherjee and Achintya Ray
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Ku-Chu Tsao: School of Economics and Trade, Hubei University of Economics, Wuhan 430205, China
Achintya Ray: Department of Economics and Finance, College of Business, Tennessee State University, 330 10th Ave. N., Nashville, TN 37203, USA

Games, 2021, vol. 13, issue 1, 1-20

Abstract: In this article, we consider technology leaders (which are innovators) and technology followers (which are non-innovators) to provide a new theoretical explanation for the well-cited empirical evidence of an inverted-U relationship between competition and aggregate innovation. We consider a two-stage game with a deterministic Research and Development (R&D) process, where the leaders first determine their R&D investments simultaneously and then all leaders and followers determine their outputs simultaneously. We show that the inverted-U relationship between competition and aggregate innovation occurs if competition is affected by the number of technology followers. However, the presence of more technology leaders decreases individual R&D investments while increasing aggregate R&D investments. If the total number of firms remains the same but the composition of technology leaders and followers changes in favor of leaders (followers), individual R&D investments decrease (increase) but aggregate R&D investments increase (decrease). The relationship between competition and R&D investments can be U-shaped if the intensity of competition is measured by product substitutability. Contrary to the standard expectation, the presence of more firms may reduce welfare.

Keywords: competition; innovating firms; non-innovating firms; R&D investments; welfare (search for similar items in EconPapers)
JEL-codes: C C7 C70 C71 C72 C73 (search for similar items in EconPapers)
Date: 2021
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