Information Acquisition and Innovation under Competitive Pressure

Abstract

This paper studies information acquisition under competitive pressure and proposes a model to examine the relationship between product market competition and the level of innovative activity in an industry. Recent empirical papers point to an inverted-U shape relationship between competition and innovation. Our paper o¤ers theoretical support to these results while employing a more accurate de…nition of innovation than the previous literature; more precisely, we isolate innovation from riskless technological progress. The …rms in our model learn of an invention and decide on whether and when to innovate. In making this decision, …rms face a trade-o¤ between seeking a …rst-mover advantage and waiting to acquire more information. By recognizing that a …rm can intensify its innovative activity on two dimensions, a temporal and a quantitative one, we show that …rms solve this trade-o¤ precisely so as to generate the inverted-U shape relationship. When the competition in the pre innovation market is su¢ ciently high, the level of competition in the post innovation market is endogenous. We investigate the welfare e¤ects of innovation under competitive pressure and …nd conditions that determine the socially optimal level of competition. We study the e¤ects that the degree of technological spread in the industry has on innovation and highlight the roles that strategic uncertainty and the discreteness of the information acquisition process play in this context. JEL Clasi¢ cation: D40, L10

Innovation, R&D Spillovers, and the Variety and Concentration of the Local Industry Structure*

“…Interestingly, the presence of inter‐industry R&D spillovers affects this outcome, as shown in the present study. As such, the combination of the two spillover channels presents a novel context that can generate the inverted‐U relationship between innovation and competition, which has generated interest elsewhere (Kamien and Schwartz, ; Aghion et al ., ; Belleflamme and Vergari, ; Barbos, ).…”

“…Interestingly, the presence of inter-industry R&D spillovers affects this outcome, as shown in the present study. As such, the combination of the two spillover channels presents a novel context that can generate the inverted-U relationship between innovation and competition, which has generated interest elsewhere (Kamien and Schwartz, 1976;Aghion et al, 2005;Belleflamme and Vergari, 2011;Barbos, 2015). Even in industrial economics, research into inter-industry spillovers is almost non-existent and most extensions concern R&D cooperation in the context of a single industry.…”