Firm Size vis-à-vis Industry Size and Innovation in a Dominant Firm-fringes Oligopoly Model

Abstract

This article explores the possibility of associating firm size vis-à-vis industry size with firm-level R&D led-innovation and the resultant impact(s) on industry level output and price. We consider an oligopolistic industry having one dominant firm and some fringes. Innovation by the dominant firm is viewed both as a technological breakthrough and as (cost) augmenting monetary expenditure. When innovation is considered as technological breakthrough, then for the benevolent industry leader, its scope for output expansion is more if R&D is induced by the industry size vis-à-vis firm size. However, when R&D led innovation is seen as cost augmenting, then the industry size induced innovation yields greater output if the dominant firm acts as a Stackelberg leader. Therefore, we show that exploiting the industry size renders a higher incentive to innovate for the industry leader in terms of capacity expansion.