Barbos, Andrei (2009): Information Acquisition and Innovation under Competitive Pressure.
Download (685kB) | Preview
This paper studies information acquisition under competitive pressure and proposes a model to examine the relationship between product market competition and the level of innovative activity in an industry. Recent empirical papers point to an inverted-U shape relationship between competition and innovation. Our paper offers theoretical support to these results while employing a more accurate definition of innovation than the previous literature; more precisely, we isolate innovation from riskless technological progress. The firms in our model learn of an invention and decide on whether and when to innovate. In making this decision, firms face a trade-off between seeking a first-mover advantage and waiting to acquire more information. By recognizing that a firm can intensify its innovative activity on two dimensions, a temporal and a quantitative one, we show that firms solve this trade-off precisely so as to generate the inverted-U shape relationship. When the competition in the pre innovation market is sufficiently high, the level of competition in the post innovation market is endogenous. We investigate the welfare effects of innovation under competitive pressure and find conditions that determine the socially optimal level of competition. We study the effects that the degree of technological spread in the industry has on innovation and highlight the roles that strategic uncertainty and the discreteness of the information acquisition process play in this context.
|Item Type:||MPRA Paper|
|Original Title:||Information Acquisition and Innovation under Competitive Pressure|
|Keywords:||Innovation; Competition; Information Acquisition|
|Subjects:||D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L10 - General
D - Microeconomics > D4 - Market Structure, Pricing, and Design > D40 - General
|Depositing User:||Andrei Barbos|
|Date Deposited:||10. Jul 2010 10:00|
|Last Modified:||22. Feb 2013 04:41|
Abreu, D. and M. K. Brunnermeier (2003): "Bubbles and Crashes," Econometrica, 71, 173-204.
Aghion, P., N. Bloom, R. Blundell, R. Griffith, P. Howitt (2005): "Competition and Innovation: An Inverted U Relationship," Quarterly Journal of Economics, 120, 701-728.
Aghion, P., M. Dewatripont, P. Rey (1997): "Corporate governance, competition policy and industrial policy," European Economic Review, 41, 797-805.
Aghion, P., M. Dewatripont, P. Rey (1999): "Competition, Financial Discipline, and Growth," Review of Economic Studies, 66, 825-852.
Aghion, P., C. Harris, J. Vickers (1997): "Competition and Growth with Step-by-Step Innovation: An Example," European Economic Review, Papers and Proceedings, 41, 771-782.
Aghion, P. and P. Howitt (1992): "A Model of Growth Through Creative Destruction," Econometrica, 60, 323-351.
Aghion, P. and P. Howitt (1996), "Research and Development in the Growth Process," Journal of Economic Growth, 1, 49-73.
Aghion, P. and P. Howitt (1998): Endogenous Growth Theory, MIT Press, Cambridge and London.
Ahn, S. (2002): "Competition, Innovation and Productivity Growth: A Review of Theory and Evidence", Economics Department Working Papers, No. 317, OECD Publishing.
Arrow, K. J. (1962) "Economic welfare and the allocation of resources for invention," The Rate and Direction of Inventive Activity: Economic and Social Factors, NBER, Princeton University Press.
Bloom, N., J. Van Reenen (2002): "Patents, Real Options and Firm Performance," Economic Journal, 102, C97-C116.
Blundell, R., R. Griffith, J. van Reenen (1999): "Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms," Review of Economic Studies, 66, 529-54.
Bolton, P. and C. Harris (1999): "Strategic Experimentation," Econometrica, 67, 349-374.
Boone, J. (2000): "Competitive pressure: the effects on investments in product and process innovation", RAND Journal of Economics, 31, 549-569.
Boone, J. (2001): "Intensity of competition and the incentive to innovate," International Journal of Industrial Organization, 19, 705-726.
Boone, J. (2008): "Competition: Theoretical Parameterizations and Empirical Measures," Journal of Institutional and Theoretical Economics, 164, 587-611.
Bound, J., C. Cummins, Z. Griliches, B. Hall, A. Jaffe (1984): "Who Does R & D and Who Patents?" in Zvi Griliches (ed.), A & D, Patents, and Productivity, University of Chicago Press, Chicago.
Cohen, W., R. Levin, D. Mowery (1987): "Firm Size and R&D Intensity: A Re-Examination," Journal of Industrial Economics, 35, 543-565.
Comanor, W. S. and F. Scherer (1995), "Rewriting History: The Early Sherman Act Monopolization Cases," International Journal of the Economics of Business, 2(2), pp.263-89.
Chamley, C. and D. Gale (1994): "Information Revelation and Strategic Delay in a Model of Investment," Econometrica, 62, 1065-1085.
Cripps, M, R. G. Keller, S. Rady (2005): "Strategic Experimentation with Exponential Bandits," Econometrica, 73, 39-68.
Decamps, J-P. and T. Mariotti (2004): "Investment timing and learning externalities," Journal of Economic Theory, 118, 80-102.
Geroski, P. (1995): "Innovation and Competitive Advantage," OECD Economics Department Working Papers, No 159.
Geroski, P. (1995): Market Structure, Corporate Performance and Innovative Activity, Oxford: Oxford University Press.
Hart, O. (1983): "The Market Mechanism as an Incentive Scheme," Bell Journal of Economics, 14, 366-382.
Jensen, R. (1982): "Adoption and diffusion of an innovation of uncertain profitability," Journal of Economic Theory, 27, 182-193.
Kamien, M. and N. Schwartz (1976): "On the Degree of Rivalry for Maximum Innovative Activity," Quarterly Journal of Economics, 90, 245-260.
Kotler, P. and Armstrong (2005): Principles of Marketing, Prentice Hall.
Lieberman, M. and D. Montgomery (1988): "First-Mover Advantages," Strategic Management Journal, 9, 41-58.
Loury, G.C., (1979): "Market Structure and Innovation," Quarterly Journal of Economics, 93, 395--410.
Mansfield, E. (1968a): Industrial Research and Technological Innovation: An Econometric Analysis, W. W. Norton Company, New York.
Mansfield, E. (1968b): The Economics of Technological Change, W. W. Norton Company, New York.
Mansfield, E., J. Rapoport, A. Romeo, E. Villani, S. Wagner, F. Husic (1977) The Production and Application of New Industrial Technology, W. W. Norton Company, New York.
Martin, S. (1993) "Endogenous Firm Efficiency in a Cournot Principal-Agent Model," Journal of Economic Theory, 59, 445--450.
Nickell, S.J. (1996): "Competition and Corporate Performance," Journal of Political Economy, 104, 724-746.
Oberfield, E. and N. Trachter (2010) "Period Length and the Set of Dynamic Equilibria with Commodity Money," working paper, University of Chicago.
Porter, M. E. (1990): The Competitive Advantage of Nations, Macmillan, London.
Reinganum, J. (1983): "Uncertain Innovation and the Persistence of Monopoly," American Economic Review, 73, 61-66.
Scherer, F. (1967) "Market structure and the employment of scientists and engineers", American Economic Review, 57 (3), 524-531.
Scherer, F. (1984): Innovation and Growth: Schumpeterian Perspectives, MIT Press, Cambridge.
Schmidt, K. (1997): "Managerial Incentives and Product Market Competition," Review of Economic Studies, 64, 191-213.
Schumpeter, J. (1943): Capitalism, Socialism and Democracy, Allen Unwin, London.
Available Versions of this Item
- Information Acquisition and Innovation under Competitive Pressure. (deposited 10. Jul 2010 10:00) [Currently Displayed]