Technological Progress in Races for Product Supremacy

This draft 07/18/06 How does market organization a¤ect quality innovation e¤orts and social welfare? Three stochastic dynamic market structures con-sidered are monopoly, duopoly, and social planning. Products can be either linearly or nonlinearly substitutable. The introduction of a step function allows richer innovation strategies. First, given non-linear substitution, a duopoly may follow an unbalanced evolution path and have a technology frontier not dominated by that in social planning. This result does not hold for the linear substitution case. Second, ex ante and long-run welfare values are always the highest in social planning and the lowest in monopoly. Thus, policies should encourage static and dynamic competition