Abstract: Much of the discussion on the topic of market structure and innovation has focused upon the relationship between market structure and the research and development effort of firms (or industries). The issues of concern in this literature are the effects of monopoly power, firm size, the ability to diversify and the degree of rivalry upon the allocation of resources to research and development.' An important issue that has been ignored is the type of good that will be introduced by firms. The purpose of this paper is to extend the literature by examining the incentive to produce goods which are either substitutes or complements to existing goods. We demonstrate that the character of new goods is dependent upon the profit incentive of potential innovation both inside and outside the industry producing the existing good. In deciding whether or not to introduce the new product, a firm has to consider three factors: the demand, the cost and the research activities of other firms. Figure 1 provides a schematic diagram for the firm's decision process. It is clear that in reality the firm must consider the probability associated with it being the sole source of a new good and the probability associated with the introduction of the new good by other firms. In this paper, we assume that the firm believes that it will be the only potential source of the new good; i.e. the new good will not be provided by other firms regardless of whether or not the firm produces the new good. This is path A in Figure 1. Though this is a special case, it does provide a necessary first step to a more general model. In our framework, potential innovators are classified according to the relationship between the new product and their current output. We define an outsider as a firm for which the new product has no effect on the demand for its current product, and an insider is defined as a firm whose demand is affected by the new product. We also assume that in-
Publication Year: 1981
Publication Date: 1981-10-01
Language: en
Type: article
Indexed In: ['crossref']
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Cited By Count: 6
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