Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- List of cases
- Preface
- Part I Getting started
- Part II Market power
- Part III Sources of market power
- Part IV Pricing strategies and market segmentation
- Part V Product quality and information
- Part VI Theory of competition policy
- Part VII R&D and intellectual property
- 18 Innovation and R&D
- 19 Intellectual property
- Part VIII Networks, standards and systems
- Part IX Market intermediation
- Appendices
- Index
18 - Innovation and R&D
from Part VII - R&D and intellectual property
- Frontmatter
- Contents
- List of figures
- List of tables
- List of cases
- Preface
- Part I Getting started
- Part II Market power
- Part III Sources of market power
- Part IV Pricing strategies and market segmentation
- Part V Product quality and information
- Part VI Theory of competition policy
- Part VII R&D and intellectual property
- 18 Innovation and R&D
- 19 Intellectual property
- Part VIII Networks, standards and systems
- Part IX Market intermediation
- Appendices
- Index
Summary
In this chapter, our goal is to examine the interplay between market structure and innovation. This is clearly a two-way relationship: on the one hand, firms' incentives to invest in R&D depend on the structure of the product market they are acting in (i.e., on the number of rival firms and on the way they compete); on the other hand, firms are likely to use R&D to shape the structure of their market (e.g., by using R&D to increase their market share or to keep potential competition at bay). As the two effects are complex and intertwined, we simplify the analysis by assuming that firms can somehow appropriate the return from their R&D investments (we analyse how they actually manage to do so in the next chapter). We also break down the analysis into separate issues.
First, in Section 18.1, we assess how market structure affects the incentives for conducting R&D, which are measured by the profit increase that the innovator gains from the innovation. First, incentives to innovate are compared in the two market structures where strategic considerations are absent, namely monopoly and perfect competition. It is shown that the latter generates larger incentives to innovate than the former. Next, we extend the analysis to include strategic interaction by considering oligopolies. We reach an ambiguous result: a higher intensity of competition may increase or decrease the incentives to innovate depending on the initial starting point, the size of the innovation and the way competition is increased.
- Type
- Chapter
- Information
- Industrial OrganizationMarkets and Strategies, pp. 479 - 504Publisher: Cambridge University PressPrint publication year: 2010