Competition and product innovation in dynamic oligopoly

Ronald Goettler () and Brett Gordon ()

Quantitative Marketing and Economics (QME), 2014, vol. 12, issue 1, 42 pages

Abstract: We investigate the relationship between competition and innovation using a dynamic oligopoly model that endogenizes both the long-run innovation rate and market structure. We use the model to examine how various determinants of competition, such as product substitutability, entry costs, and innovation spillovers, affect firms’ equilibrium strategies for entry, exit, and investment in product quality. We find an inverted-U relationship between product substitutability and innovation: the returns to innovation initially rise for all firms but eventually, as the market approaches a winner-take-all environment, laggards have few residual profits to fight over and give up pursuit of the leader, knowing he will defend his lead. The increasing portion of the inverted-U reflects changes in firm’s investment policy functions, whereas the decreasing portion arises from the industry transiting to states with fewer firms and wider quality gaps. Allowing market structure to be endogenous yields different results compared to extant work that fixes or exogenously varies the market structure. Copyright Springer Science+Business Media New York 2014

Keywords: Competition and innovation; R&D; Dynamic oligopoly; Inverted-U; Spillovers; C73; D43; L11; L13; L40 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (24)

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DOI: 10.1007/s11129-013-9142-2

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