COMPETITION, R&D, INNOVATION & QUALITY-GENERATED GROWTH By ANTONIA J. SWANN*

It is common wisdom that in a static setting, increased rivalry among firms leads to increased innovation and increases in consumer surplus. What is not as obvious is that an increase in competition may be beneficial to consumers in a dynamic setting. This paper offers a theoretical underpinning behind empirical evidence that suggests a positive correlation between competition and growth (Richard Blundell, 1999). This paper has two goals: (1) to theoretically analyze the impact of increased competition on individual firm effort and to compare this with the impact on sectoral growth rates, for various degrees of sectoral R&D duplication; and, (2) to determine if competition can be good for growth even with moderate R&D duplication. I. Sketch of the Quality-Innovations Model In this theoretical partial-equilibrium vertical innovation-based endogenous growth model, firms play a central role. Firms vie to become the next monopoly and utilize R&D as their strategic tool. Initially, assume that a general purpose technology (GPT) shock, such as the Internet, significantly lowers sunk costs or ancillary antitrust entry barriers (R. Preston McAfee et al., 2004), within a specific sector, which allows in small, less-experienced potential entrants. An example of this occurred in the ‘digital sector’, see Danny Quah (2003), where products are idea-based and where almost anyone can put up a web page i.e., the sector producing academic journals, music and film