Competition and Innovation in Markets with Technology Leaders

Tsao, Ku-Chu; Mukherjee, Arijit; Ray, Achintya

Abstract

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 R&D process where the leaders first determine their R&D investments simultaneously and then all the leaders and the 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 but increases aggregate R&D investments. If the total number of firms remains the same but the composition of the technology leaders and followers changes in favor of the leaders (followers), the individual R&D investments decrease (increase) but the 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.

• Journal Article Type: Article
• Acceptance Date: Dec 23, 2021
• Online Publication Date: Dec 30, 2021
• Publication Date: 2022-02
• Deposit Date: Jan 4, 2022
• Publicly Available Date: Jan 5, 2022
• Journal: Games
• Electronic ISSN: 2073-4336
• Peer Reviewed: Peer Reviewed
• Volume: 13
• Issue: 1
• Article Number: 9
• DOI: https://doi.org/10.3390/g13010009
• Keywords: Competition; Innovating firms; Non-innovating firms; R&D investments; Welfare
• Public URL: https://nottingham-repository.worktribe.com/output/7164896
• Publisher URL: https://www.mdpi.com/2073-4336/13/1/9