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Competition and Innovation in Markets with Technology Leaders

Author

Listed:
  • Ku-Chu Tsao

    (School of Economics and Trade, Hubei University of Economics, Wuhan 430205, China)

  • Arijit Mukherjee

    (Industrial Economics, Nottingham University Business School, Wollaton Rd., Lenton, Nottingham NG8 1BB, UK)

  • Achintya Ray

    (Department of Economics and Finance, College of Business, Tennessee State University, 330 10th Ave. N., Nashville, TN 37203, USA)

Abstract

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

Suggested Citation

  • Ku-Chu Tsao & Arijit Mukherjee & Achintya Ray, 2021. "Competition and Innovation in Markets with Technology Leaders," Games, MDPI, vol. 13(1), pages 1-20, December.
    • Handle: RePEc:gam:jgames:v:13:y:2021:i:1:p:9-:d:714399
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    References listed on IDEAS

    as
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    3. Xavier Vives, 2008. "Innovation And Competitive Pressure," Journal of Industrial Economics, Wiley Blackwell, vol. 56(3), pages 419-469, December.
    4. Gene M. Grossman & Elhanan Helpman, 1994. "Endogenous Innovation in the Theory of Growth," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 23-44, Winter.
    5. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626, National Bureau of Economic Research, Inc.
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