Arrow Meets Hotelling: Modeling Spatial Innovation

Steven Callander, Nicolas Lambert and Niko Matouschek

AEA Papers and Proceedings, 2021, vol. 111, 538-43

Abstract: We combine a spatial model of innovation with Hotelling's model of competition. Innovations are vertically and also horizontally differentiated. Potential innovators choose not only whether to innovate but also how to innovate. The bolder they are with a new product, the riskier is the outcome but the softer will be the resulting market competition with existing products. We use the model to explore the interaction of competition and innovation and address several classic questions. The recurring finding is that increased market competition drives not only more innovation but more novel and riskier innovation that offers a higher chance of breakthrough outcomes.

JEL-codes: D21 L11 O31 R12 R32 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1257/pandp.20211051

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