Uncertainty, Industrial Structure, and the Speed of R and D

Abstract

This paper studies the nature and consequences of competition in R&D and the relationship between this form of competition and competition in the product market, by focusing on comparisons of speed of research, number of independent research laboratories, and level of risk undertaken. Among the results: competition in the current product market reduces the level of innovation (relative to monopoly); competition in R&D increases the level of innovation, possibly beyond the socially optimal level. Under certain conditions, it pays a monopolist to preempt potential competitors, thereby enabling the monopoly to persist. Market equilibrium may entail excessively fast research with insufficient risk-taking.