Looking for Mr. Schumpeter: Where Are We in the Competition-Innovation Debate? 

Innovation and Economic Growth and Competition Policy and Antitrust

Article Snapshot


Richard Gilbert


Adam B. Jaffe, Josh Lerner and Scott Stern (eds.), Innovation Policy and the Economy, NBER, 2006


This paper looks at the relationship between competition and innovation.

Policy Relevance

Sometimes, competition can mean more innovation; but at other times, having fewer firms can promote innovation.

Main Points

  • Increasingly, competition regulators at the Federal Trade Commission and the Department of Justice express concerns that mergers can discourage innovation. 

  • Without exclusive rights like patents, having too many firms competing to share the profits from a new technology means that none makes enough profit to recoup research costs, discouraging innovation.  

  • With exclusive rights like patents, in theory, if a monopolist cannot make more money from a new technology than from an existing technology, it is not likely to innovate.
    • If some consumers are willing to pay more for the new technology than for the old, but others are not, monopolists have reason to innovate.
    • A monopolist might innovate to preempt others’ innovations, to prevent new firms from arising as competitors. Studies show this is rarely successful. 

  • In practice, drastic new innovations tend to come from new firms, but existing firms seem to focus on smaller improvements to familiar products.
    • Studies show that firms tend to seek innovations that will cut into rivals’ profits and avoid those that would reduce their own.
  • More firms does not necessarily mean more diverse innovation. A single firm might support many many projects. But each firm tends to have a dominant culture that limits diversity within the firm.
  • Economist Joseph Schumpter argued that monopolies can be good sources of innovation. Studies show that in practice, competition can promote competition more. But the issue is very complex so results are not conclusive.
    • Competition between products and processes is different.
    • Competition is different when technology is protected by rights like patents.

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