Author(s)
Source
In The Rate and Direction of Inventive Activity Revisited, Josh Lerner and Scott Stern, eds., Chicago: University of Chicago Press, 2012, pp. 361-404
Summary
This chapter discusses the relationship between competition policy and the rate of innovation by firms.
Policy Relevance
Innovation should proceed in a market proportionate to the extent that multiple firms are competing to win future profits.
Main Points
- Celebrated economists Kenneth Arrow and Joseph Schumpeter suggested, in varying formulations, that commercial innovation results from firms competing in a market to deliver new goods and capture future profits.
- The author suggests three principles to explain firms’ decisions to pursue innovation.
- The prospect of increasing future profits by providing greater value to consumers spurs innovation by firms.
- When the possibility of controlling the benefits of an innovation is greater, firms are more likely to innovate.
- Firms are more likely to innovate when their existing assets make innovation in a particular area easier.
- The relationship between competition policy—the extent to which competitors are permitted to merge and coordinate activity—and innovation is complicated and delicate.
- It is impossible to say without more information that any merger between large competitors is likely to decrease innovation.
- However, a general principle may be claimed: as long as multiple firms are competing with one another, it is likely that a market will experience innovations.