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

Todorova, Tamara (2021): Market Power and the Incentive to Innovate: A Return to Schumpeter and Arrow.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: competition, monopoly, innovation, profit
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D41 - Perfect Competition; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D42 - Monopoly; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O32 - Management of Technological Innovation and R&D

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