Quadratic Costs and Innovation: The Role of Technology

Abstract

Abstract In a Cournot oligopoly set up with constant marginal cost and linear demand, innovation is rewarding. In this paper we show that the same is not true when marginal costs are increasing. We endogenize the success probability of R&D and its response to the intensity of competition and specifically show that if the technology is already advanced and competition intensifies then firms wouldn’t innovate. We attempt to capture and explain the interaction of technology with the possibility of innovation via the intensity of competition. We finally suggest ‘monitored competition’, wherein initially (at initial stages of innovation) competition is encouraged and then (at later stages of innovation) curtailed, to encourage innovation and thus welfare, as a suitable policy measure. Thus, entry should be restricted in order to foster innovation while innovation itself encourages entry. JEL Codes: L11; L13; L21.