Industrial Structure, Rivalry and Innovation

Innovation has long been recognised as a vital ingredient in fuelling economic growth and raising economic standards of living. However, despite its acknowledged importance, it has not been a central occupation of economic analysis until relatively recently. Its very nature made accommodation with the prevailing economic conventions difficult. Its tendency to involve long time horizons, uncertainty, novelty and heterogeneity fitted uncomfortably with the deterministic, static, perfect competition framework of conventional theory. Joseph Schumpeter’s major contribution was to develop a systematic and coherent analysis of the effect of market structure on innovative activity. In doing so he had to break with the straitjacket imposed by traditional micro-economic theory: The first thing to go is the traditional conception of the modus operandi of competition. Economists are at long last emerging from the stage in which price competition was all they saw.… But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organisation … competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. (Schumpeter 1950: 84)