Is Competition Good for Innovation? A Simple Approach to an Unresolved Question
By Armin Schmutzler, University of Zürich, Switzerland, armin.schmutzler@soi.uzh.ch
Abstract
The relation between the intensity of competition and R&D investment has received a lot of attention, both in the theoretical and in the empirical literature. Nevertheless, no consensus on the sign of the effect of competition on innovation has emerged. This survey of the literature identifies sources of confusion in the theoretical debate. My discussion is mainly based on a unified model that simplifies the comparison of different results. This model is also applied to show which factors work in favor of a positive relation between competition and innovation.
Is Competition Good for Innovation?
Is Competition Good for Innovation? investigates the relation between competition and innovation. It provides a simple framework that helps to understand two issues: 1. What are the sources of the ambiguous relation between competition and innovation? 2. Which factors are conducive to a positive relation between competition and innovation? Chapter 2 identifies the first source of ambiguity between competition and innovation. In Chapter 3 the author reviews a simple framework that is general enough to contain the simple introductory examples and many familiar models from the literature as special cases. Chapter 4 considers several simple examples – the examples help to understand the different possible meanings of competition, that the effects of competition on innovation are ambiguous, and to identify the sources of ambiguities. Chapter 5 extends the analysis to deal with asymmetric firms. Chapter 6 treats various extensions of the simple framework that have received some attention in the literature. Chapter 7 moves towards the empirical literature and will also summarize a few contributions that have dealt with the relation between competition and innovation in laboratory experiments. Chapter 8 provides concluding remarks.
