MERIT-Infonomics Research Memorandum series On The Variance of Market Innovation with the Number of Firms

This paper models a dynamic innovation process to examine the relationship between levels of R&D and market structure. In contrast to most of the literature the model includes positive feedbacks within the R&D process of a rm, wherein one output of R&D is knowledge, and accumulating knowledge in the present makes future R&D less costly. This creates a feedback by which market structures can aect steady state levels of R&D. We nd that in general while an increase in the number of rms in an industry reduces R&D per rm this eect is sub-linear so industry R&D increases. The model also endogenizes the number of rms, using a zero prot condition. Finally, welfare eects are discussed. JEL Classication: L00, L01, L02, O3